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Stay constructive on markets despite Covid-19 mutation twist

Ng Qi Siang
Ng Qi Siang1/4/2021 12:09 PM GMT+08  • 4 min read
Stay constructive on markets despite Covid-19 mutation twist
Investors should overweight on equities, especially in Asia ex-Japan. EM High-Yield bonds are also recommended.
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As a new strain of Covid-19 launches a “British Invasion” worldwide, investors may understandably be worried about the trajectory of global economic recovery. But with scientists confident that vaccines will sooner or later be able to combat the new strain, Bank of Singapore Head of Investment Strategy Eli Lee remains constructive on markets.

The new strain is reportedly more infectious but not deadlier than previous strains. The outbreak of this new mutation has disrupted the economic recovery and seen a pullback in equity sectors correlated with economic re-opening such as airlines and hospitality. Still, the wider impact of this new strain on global risk assets and the economic recovery remain unclear.

SEE:Should we fear inflation in 2021? Bank of Singapore's chief economist weighs in

Notes Lee in a broker’s report dated Jan 4, “As we maintain core portfolio exposure to key growth sectors, such as technology and healthcare, we continue to advocate carefully rebalancing portfolio weights into value and cyclical sectors which will benefit from the re-opening and economic normalization ahead.”

Markets will also be eyeing the results of the Georgia Senate run-off elections in the US, which were called due to close results in November. The balance of power in the upper house of congress is at stake as should the Democratic candidates win both seats, the Democrats would gain control of the senate with the casting vote of Vice-President-elect Kamala Harris, who presides over it.

Despite popular fears that a “blue wave” would encourage President-elect Joe Biden to raise taxes, Lee believes that such a scenario is in fact net bullish for markets. Democratic control of the senate will likely herald a substantial relief aid package in 1Q2021 that is at least US$1 trillion ($1.32 trillion) followed by a substantial infrastructure, healthcare and sustainability spending.

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“This would accelerate the US recovery, and we believe this scenario would be broadly bullish for risk assets (particularly equities, credit, commodities, and emerging markets); bearish for the US dollar; and also put upward pressure on Treasury yields,” he observes.

According to poll tracker RealClearPolitics both Democratic candidates enjoy a hairline lead over their Republican opponents in the polls - well within the margin of error.

Ultimately, markets are likely to remain favourable for investors. “In our view, despite the scope for some ebb and flow ahead, the market is broadly in the early innings of the post-pandemic cycle and will continue to be buoyed by the broad tides of economic recovery and supportive monetary policy,” Lee writes.

Cumulative changes in US money market fund holdings, he adds, suggests that only half of the recession-driven inflow into cash has so far been reversed. This, Lee believes, hints at reserves of dry powder for deployment into risk assets going forward.

“During the 2008 Great Financial Crisis and the 2001 Tech Crisis, the inflows into US money market funds triggered by the respective recessions fully reversed over time, which helped fuel the post-recession bull markets in the last two cycles as investors redeployed cash into risk assets,” he shares.

For now, Lee recommends investors overweight overall on equities in favour of Asia ex-Japan counters. While equity valuations are not outright cheap based on price-to-earnings ratio, this is because they are proving to be a more significant attractive proposition for investors in an ultra-low interest rate environment as bond yields fall with near-zero interest rates.

Investors looking in the bond space should prioritise yield in their search. Lee thinks that Emerging Market High-yield bonds as being a favourable investment due to their better yield in the bond universe. While more secure, developing market investment-grade bonds may not have sufficient yields to justify an investment.

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