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Rebuilding the US economy as markets remain strong in Covid-19 end game
Lombard Odier Private Bank
As we leave 2020 well behind and vaccination programmes bring us out of the Covid-19 mire, it is now time to look towards the future and at the shape of the investment landscape. Market valuations are high, so should investors stay invested in equities? Should we consider cryptocurrencies? Will the push towards infrastructure spending in the US open up more opportunities for investors?
Our latest Lombard Odier Rethink Perspectives webinar asked these very questions with some of our thought leaders outlining their view on the short and long-term future and emerging key trends for investors.
Refreshing the US
Stateside, change is finally on the way both socially and structurally. A USD 4 trillion plan to invest in US infrastructure and social welfare holds promise of mending the fractures that have been exacerbated in American society post 2008/2009 great financial crisis. Lombard Odier’s Chief Economist Samy Chaar says that after a decades-long lack of investment in the US, plans to spend on roads, jobs, wages and education is a positive and progressive step.
Post-pandemic plans by the Biden administration include USD 2.2 trillion on infrastructure and USD 1.8 trillion on an 'American Families Plan' which will invest in education, childcare and paid family leave. After years where infrastructure has fallen into disrepair and society has become imbalanced, the investment is a welcome move.
“This is a very ambitious plan, and to a certain extent, a fiscal revolution. The Americans have the foot on the accelerator. In our view, it’s a risk worth taking. The benefits of the new social spending measures, targeting jobs, education, productivity, and Medicare, clearly outweigh the costs,” said Mr Chaar.
The US infrastructure is in dire shape. It’s like a house built in the 50s: energy is being wasted, the walls are at risk of crumbling down and it needs refurbishing. Finally, Americans are investing in their own backyard and this plan targets an area of chronic underinvestment. Furthermore, the Biden administration wishes to avoid repeating the errors of past austerity, which led to stagnant growth and growing inequalities.
The year in the markets
Will 2021 see the recovery in the financial markets continue? We are constructive on equity markets, and favour risk assets over high quality bonds. Moreover, investors should have a cautious stance on gold in the short-term. In the next 12 to 15 months, we see long-term US yields at 2.5%1. Our Chief Investment Officer, Private Bank, Stéphane Monier says equity valuations are high, buoyed by expectations of a strong recovery and retail investors’ activity. This is not a sell signal, and we expect them to remain high in the immediate future, supported by strong earnings per share.
“We think valuations will remain elevated for some time because corporates will report better earnings over the course of 2021. During the first quarter, consensus expectations were already significantly revised,” he said.
The effect of the expected increase in long-term real US rates will affect gold with expectations that the price will reach USD 1,600 per ounce2 by the end of the year. So where do we look for returns for our clients’ portfolios? Chinese debt is one area. The asset class offers an attractive yield, and remains supported by strong inflows and a positive outlook for the renminbi. “We have seen a change in attitude by the Chinese authorities, putting more pressure on state corporations in order to get a more professional management of their balance sheet and their debt,” said Stéphane Monier.
Sustainability remains a central investment theme at Lombard Odier and we believe it will be a source of significant risk-adjusted returns for our clients. In November, we launched our Natural Capital strategy and we have already seen success – from the eagerness of investors to come on-board with our vision for sustainable investment. “You need to invest in companies that are providing solutions to the climate crisis or are changing their business model to reduce their carbon emissions.”
Cryptocurrencies
One of the effects of expensive equity markets has been a spike in the value of certain cryptocurrencies. Bitcoin has achieved a remarkable rise since 2020. We expect that cryptocurrencies will be used more and more as a payment solution in the future. But as an investment, they are difficult to value.
What is of interest is the technology behind them. Blockchain, the virtual ledger that stores all bitcoin transactions, is an interesting technology and an area that shows a lot of promise. Lombard Odier’s Managing Partner, Frédéric Rochat, said that cryptocurrencies will be a means of payment in a matter of time and at Lombard Odier, we are reviewing and considering how to participate in this trend.
“Blockchain is the technology underpinning the bitcoin. Blockchain will revolutionise many areas of banking, the way that back offices are structured and offer new services to our clients,” he said. As Lombard Odier is not just a wealth manager but also an expert in technology for banking - we are always looking to invest in new technologies.
A gradual reopening
The spread of successful vaccination programmes means that we hope Europe will have vaccinated its populations by the middle of the summer. This will mean the main economic blocks will be able to truly reopen their economies.
The bigger European economies such as Spain, France, Italy are vaccinating more than half a percent of their population every day.
“In the second half of the year, vaccination should be more widespread in the emerging countries, allowing a global reopening. We’re at the end of the tunnel but the length of this tunnel depends on the vaccination process,” explained Samy Chaar.
“The recovery might not be evident to all, it’s still fragile, uneven and many things can still go wrong. Nonetheless, we have to acknowledge that there’s a recovery unfolding. We’re moving away from the Covid shock.”
Pathway to building back better
Recovery will of course take time. And it is not to be taken for granted. But we expect the positive market sentiment to continue. And there is already evidence of investors shifting towards sustainable investing themes.
Here is where we feel the future lies. When building back better, the opportunity for investors lies in companies that have sustainability at their core.
1 Source: Bloomberg, Lombard Odier calculations.
2 Source: DataStream, Bloomberg, Lombard Odier calculations.
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