The US, China and the vaccine rollout.
Recent macro data from the US and China appears encouraging, showing a modest recovery in economic conditions. PMIs in both countries have been recovering and hovering around the mid-to-high 50s area, compared to the high 40s in most European countries. Further, both unemployment and economic growth are on a better path in the US and China when compared to the Eurozone. However, controlling the virus spread and speeding up vaccine rollouts remain the key factors towards economic recovery. The US has been steadily increasing its daily vaccine rollout speed, with 9.05% of its population already vaccinated. Other developed countries are off to a much slower start. EU countries, in general, have only managed to vaccinate around 2-3% of their population, and are struggling to increase daily rollout with supply disruptions in Q1.
Draghi at the helm.
Last week, Mario Draghi accepted the request from President Mattarella to attempt to form a national unity government. The request came after talks between the previous coalition partners failed. Draghi needs to be supported by a broad coalition, and while centrist pro-EU parties are likely to back it, it has to be seen whether far-right parties and M5S are willing to support a technical government. We believe Draghi has good chances to find the support necessary to form a government, also given Mattarella’s strong desire to avoid snap elections. Key items on Draghi’s agenda are dominated by the pandemic and vaccine campaign, as well as the design and the implementation of the Recovery Plan.
Markets – Looking Ahead.
Risk markets started strongly into February, reversing most of January’s losses. Looking forward, we believe the narrative for investors has not changed: Passive fixed income strategies face a grim outlook, with rates and spreads at their tights. However, there are plenty of opportunities for those who are active, for the following reasons. First, single-name and sector dispersion remains high despite low overall spreads, which gives fertile ground for alpha from picking winners vs losers. Second, most developed countries are likely to reach 50-75% immunity by mid-year, with substantial upside for cyclical sectors linked to economic reopening: transport, energy, financials and leisure. Third, more US fiscal stimulus will kick-in, driving a further repricing of long-end US rates higher. We position in three ways to capture the opportunity-set for 2021:
- Credit in selected sectors, offering robust carry at yields of 3-7%.
- Convertible debt – offering upside optionality linked to real assets and growth.
- Cash – offering downside optionality at relatively limited opportunity cost.
To read more on our latest views, please see our Silver Bullet | Brave New World or visit our Insights section.
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