- Let’s say you deposited your money into a money market account, paying 1%.
- Inflation numbers were 3% for the same year.
- I see stronger growth and lower real yields ahead as the COVID-19 vaccine-led restart accelerates and central banks limit the rise of nominal yields – even as inflation expectations climb. Inflation will have different implications compared to the past.
- The policy revolution as a response to the Covid shock implies that nominal yields will be less responsive to rising inflation risk than in the past. This suggests risk assets will perform better than in past inflationary time periods.
- Medium-term inflation risks look underappreciated. Production costs are set to rise on a rewiring of global supply chains. Central banks appear more willing to let economies run hot with above-target inflation to make up for past inflation undershoots. They may also face greater political constraints that make it harder to lean against inflation.
- Market implication: Strategically, I underweight nominal government bonds, favor inflation-linked bonds, and see equities supported by falling real rates. Tactically I am pro-risk, preferring U.S. equities and high yield credit.
2. Globalization Rewired
• The pandemic has accelerated geopolitical transformations such as a bipolar U.S. -China world order, and a rewiring of global supply chains for greater resilience – with less emphasis on efficiency.
- Strategic U.S.-China rivalry looks like it's here to stay, with competition and bifurcation in the tech sector at its core. I believe investors need exposure to both poles of global growth.
- Market implication: Strategically I favor deliberate country diversification.
3. Historic Returns
- 2019 S&P 500 returned 31.5% and bonds returned 8.7%
- 2020 S&P 500 returned 18.4% and bonds returned 7.5%
- Since 1926, we've only seen four other periods with back-to-back calendar years of returns with stocks above 16% and bond returns above 7%.
- Market implication: Investors need to be very aware of the risk their portfolio is taking. Additionally, they need to have full conviction about their investment strategy.
Source: Blackrock January Student of the market report.
👉Investment Portfolio Key Takeaways
- Maintained my overweight to stocks
- Move to neutral across the US and Developed Market equities.
- A mixture of value and growth
👉Key Index Returns
Source: Wall Street Journal, MSCI.com, MarketWatch, Morningstar
MTD returns: Nov 30, 2020-Dec 31, 2020
YTD returns: Dec 31, 2019- Dec 31, 2020
*in US dollars
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