China is the North Star of Asia
The title for our Q2 Outlook last year was “China will be the first out of the global storm”. China was the first into the Covid-19 storm and it was the first major country out of it. That view has gone from strength to strength, as for the last 3 quarters of 2020 China has dragged up the rest of North Asia and given the rest of the world a floor. With China being the North Star of the region, North Asia is the proven winner in a world consumed with Covid.
Yes, vaccines were announced on November 9th and the rollout continues, with the new US President Joe Biden hoping to roll out 100 million vaccines within in his first 100 days in office. Yet for the majority of the Northern Hemisphere (US and Europe) who are in their winter season, it will be at least summer before the vaccine is fully rolled out and virus-linked restraints are lifted sufficiently to allow economies and society to go back to the free flow of activity that most of North Asia has enjoyed for a number of quarters (with some occasional hiccups). What’s quite amazing is that China and North Asia were able to do this without a full rollout of the vaccine, so they can go from strength to strength, while economic growth in Europe and the US, and most of the rest of the world, likely takes a breather before overshooting in H2 of this year.
It is also worth noting two other key factors regarding China. Given the basing effects from 1H20, they will likely need to ramp up their activity and roll out stimulus going into Q2 of this year to get year-on-year comparisons at the preferred levels. China will also mark the 100th anniversary of the founding of the Chinese Communist Party on July 1st and will no doubt want all cylinders firing. This should continue to provide a structural tailwind behind Chinese equities, the renminbi/yuan and bonds, which are all likely to continue to appreciate strongly this year.
The US is set up for a second-half comeback
A key risk for the US economy (if not necessarily US assets) in the early days of the new Biden-Harris administration would be the declaration of a nationwide lockdown – one that arguably should have occurred a year ago. This could see further outperformance of tech and growth stocks that have done so well already during the pandemic, while “the world reopening” themed baskets (linked to improvement in the Misery Index) take a tactical breather before continuing their re-rating higher later this year.
The most important macro event of 1Q probably took place in early January. No, not the storming of Capitol Hill by Trump supporters, nor even Trump being permanently expunged from Twitter for inciting violence and false narratives, nor even the successful transition of power to the new POTUS. Rather, it was the result of the two Georgia Senate runoff elections, giving the Democrats control of the US Senate by the slimmest of margins and thus at least a weak Blue Wave that was anticipated to be rather stronger before the 2020 election. With the Senate now at 50-50, Harris as VP is the tiebreaker, and the path to more generous fiscal stimulus is that much easier.
There is likely a cap on how high treasury yields can go in the short term, given the combination of debt in the system that is only set to increase on both the Fed’s and government’s balance sheet – not to mention that we’ll have the Empress of Doves, the pioneering Janet Yellen, as the new US Treasury Secretary.
There are trading opportunities – the modest Blue Wave and crypto…
There are still a number of investment themes with tailwinds: UK Assets (especially equities), the equity energy complex (from the XLE energy ETF to blue chip majors) and eventually the reopening sectors – think transportation, tourism, hospitality (Peter Garnry’s ‘Misery Index’).
It may seem like travel and holidays are light years away, and yet starting from this summer the world is likely to embark on the biggest tourism and travel binge ever experienced, and one that could run for years. Those that used to travel have not been able to and have saved up. And those that generally don’t travel are tired of being cooped up at home or in their local environs.
We continue to expect asset class inflation across the board, driven by modern monetary theory (MMT) and the social stability agenda, plus the climate crisis and infrastructure investment focus which is set to run for years. Structural trends continue to push the US Dollar lower, while volatility is generally higher and, at some point again, we expect higher long yields, especially in the US. At the end of the day, the US cannot spend to infinity and have the market freely price their yields, while expecting to not to go bankrupt. Whether that ceiling is 1.50% on US 10s or 2.00% on US 30s remains to be seen.
An interesting development is that inflation and loss of faith in fiat money could make Bitcoin and crypto currencies winners in Q1 and for the balance of 2021. We entered a new bull market that kicked off on December 16th when Bitcoin punched through the $20,000 high seen in 2017, sending a signal that unlike 2017, this time institutional investors and big hedge funds are willing to wager that crypto is a real asset.
We need to warn that it’s still early days for crypto, with the only certainty being volatility and plenty of divergent views on the space, as well as the overhang of regulatory risk.