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Key takeaways:

  • Asset rotation is not a one-way street. Bond yields reached an intermediate top after growth optimism spiked. Hence, the staggering run of cyclical stocks may take a breather.

  • We downgraded cyclicals further by trimming materials while upgrading consumer defensives.

Meanwhile, investors have been riding the waves, first by going into crisis-proof assets, such as safe-haven bonds, consumer defensives, or healthcare stocks. Then, as of the summer of 2020, they turned around and started to pick up stocks that are more closely tied to the business cycle, such as materials and industrials. Finally, at the outset of 2021, they started to move back into the laggards, such as oil & gas and financials. In financial jargon, such moves in investor behaviour are called ‘rotations’. This might be taking into account that investors will revisit their earlier positioning at some stage.

Upside in economic prospects
Compared to consensus, we have been fairly positive on growth prospects for quite a while. We appreciated how economic policymakers handled the crisis quite early on. Q2 2021 may show the best growth on record in many economies. The new US administration is also doing a lot to sustain growth – although perhaps with less success in the latest infrastructure programme, which faces some efficiency issues (see our number of the week). In the meantime, every investor has realised that growth is improving, so it may be time for the economy to catch up with markets before asset prices go further. Therefore, we do see upside in economic prospects that will eventually be mirrored in bond yields. But before that, there may be some water treading ahead.

Conclusion for investors
In terms of investment, this means that bond yields may have seen an intermediate top, and some of the best movers in the past six months may be in for a breather. Again, this is not about heading for the doors when it comes to risk-taking but rather tweaking positions. We therefore continue to trim the cyclical exposure in stocks by downgrading materials and upgrading consumer defensives. This may be an excellent opportunity to enter or re-enter some growth names.

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