Global Strategy Q2 2021
The economic recovery should gather pace, with the euro zone markedly lagging behind the US. Uncertainty about inflation trends is weighing on the performance of safe assets. A volatile sideways move should be expected in the stock market. We consider short-term setbacks to represent buying opportunities. With respect to corporate bonds, we continue to favor BB-rated securities and it remains our view that BB-rated hybrid bonds are a sensible portfolio addition.
Economic Outlook: We expect an acceleration of the economic recovery in the 2nd quarter. In Europe, progress in the vaccination coverage of the population together with more widespread use of testing should underpin a recovery in the services sector. Thanks to the global economic upturn, the manufacturing sector is already on the road to recovery. We are forecasting GDP growth of +4.0% in the euro zone this year. We expect the US GDP growth rate to actually reach +5.9% this year. This strong economic expansion in the US should primarily be supported by the USD 1.9trn stimulus package adopted in mid-March. Furthermore, the US economy is receiving an additional boost from increasing progress in containing the pandemic. The trend in inflation rates will be a focus for financial markets this year. Due to base effects and extraordinary factors, both US and euro zone inflation should increase in the course of the year, albeit only temporarily.
Bonds: Central banks will continue to support the economic recovery with expansionary monetary policies. The ECB in particular is stressing in this context that it intends to ensure favorable financing costs. This will continue to pose a challenge as the year progresses. In light of the strengthening economic recovery and higher inflation rates this year, we expect German 10-year Bund yields to moderately increase. The Fed has hitherto countenanced the recent rise in yields and has provided no indication of a change in monetary policy. Strong economic data should push medium and long-term treasury yields up further. In corporate bonds, we recommend broadly diversified allocations to HY bonds with a focus on the BB-rated segment. BB-rated hybrid bonds, which are for the most part issued by IG-rated corporations, remain interesting as well.
Currencies: Global optimistic sentiment on the economy is dampening demand for safe haven assets. As a result we expect the Swiss franc to gradually lose ground against the euro. By contrast, the US dollar should strengthen against the euro as the economic recovery in the US is taking hold at a much more rapid and dynamic pace. The gold price has come under pressure from the rotation into riskier asset classes, but should benefit from an increase in stock market volatility in Q2.
Stock Markets: Global stock markets have probably already anticipated much of the favorable developments expected this year. In the wake of a strong performance since the beginning of the year, rising and volatile US bond yields should now lead to stronger fluctuations in the global stock market index. Sector allocation is particularly important this year, as volatility in individual sector indexes is set to vary substantially. We expect a sideways move in Q2.