"After a very strong economic rebound at the end of the crisis, we are now entering a phase of slowdown in the global economic cycle," says Gergely Majoros of Carmignac, an asset manager. Even if growth rates remain good, he reckons that "the momentum in the coming months will be less good than in recent months." He points out that within the three economically important regions of the world, there are significant divergences in terms of growth and inflation.
For China, he expects growth of around 8.2% in 2021 and 5.3% in the following two years. “China came out of the crisis before the others and entered this slowdown phase first. A very relative slowdown. Not least because they made fewer fiscal and monetary accommodations than Europe and the US. It was a political choice and they also benefitted from our stimulus plans to get out of the crisis more quickly.”
In the United States, rebound was driven by very accommodating fiscal and monetary policies. As a result, growth for 2021 is forecast at 5.7%. But the country is also entering a slowdown phase. Growth for 2022 is estimated at 4% and for 2023 at 2.3%.
As for Europe, which emerged from the crisis last, Majoros believes it is still in a catch-up phase. Growth this year is estimated at 4.5% and 4.1% next year.
The big difference with the United States is that Europe has done less in terms of fiscal stimulus, so inflation will be less of an issue than on the other side of the Atlantic, where there are risks of overheating, with the result that inflation will not go down with the cycle as in Europe, but will be more sustained. "By 2022, inflation in the US could be higher in the long term than the Fed and the market expect."
Focus on growth stocks
With this backdrop, Carmignac continues to favour equities by refocusing on growth stocks (healthcare, technology, consumer goods, etc.) in order to benefit from organic growth relatively independent of the cycle.
On the fixed income markets, selectivity and caution are the order of the day. "It is too early to take a position on core rates--mainly US or German treasury bonds--because their yield depends on the uncertain evolution of factors such as inflation or the orientation of central bank policies."
Majoros favours spread products--"anything credit, emerging markets, periphery in Europe”--which offer an attractive risk premium. He reckons that Jerome Powell, the Fed chair, sent the message that tapering and rate hike decisions will be separated during the Jackson Hole conference. In the minds of investors, the two are linked: tapering automatically implies a rate hike. This will not be the case. "For me, we are heading towards a very slow normalisation that will allow holders of spread products more time to cash in their coupons."
Chinese political risk is political risk in the regulatory sense
What about China? The outlook seems clouded by political risk. "Chinese political risk is political risk in the regulatory sense," Majoros says. "The recent regulatory intervention targeting in particular segments of the Chinese new economy is significantly more severe than previous times in 2015 and 2018. It has tackled several sub-sectors of the new economy in a short period of time and aims to correct a number of excesses in a sustainable way (dominant positions, social inequalities...). The impact on valuations has been significant. Should we anticipate that, in the name of the objective of common prosperity or in the name of the American-Chinese strategic rivalry in tech, the Beijing authorities will weaken the major internet companies in the long term, attacking private property and the legal structures created to allow foreign listings of Chinese companies? We believe not."
He states that "China remains a market in which one can perfectly well continue to invest", provided one is very selective. "We therefore maintain our convictions on a selection of stocks in the new Chinese economy. Our approach remains based on identifying companies with strong growth potential, well managed and with healthy balance sheets, benefitting from long and visible trends. Finally, given the speed and evolution of recent announcements, it seems increasingly plausible to us that visibility on the new regulatory environment should gradually improve. This will allow investors to start incorporating the new information into valuations and judge for themselves the high attractiveness of these companies."
Originally published in French by Paperjam and translated for Delano.