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Our outlook has clients asking these questions

After a strong run for markets, where are we seeing opportunities now?

Our Top Market Takeaways for January 15, 2021.

Markets in a minute

All eyes on Washington

Oh so close. After nearing all-time highs on Thursday, the S&P 500 took a turn lower late in the day (this week’s return is now standing at -80 basis points). It seems investors were sorting through a confluence of factors, both negative (still rising COVID-19 cases and deaths, continued noise in Washington, worries of overexuberance in stocks) and positive (another round of fiscal stimulus, the Fed’s commitment to keeping rates low, vaccine rollout and a much-anticipated Q4 earnings season).

The pro-cyclical jaunt was back in play with energy companies, airlines, banks, semiconductors and the like leading the pack. Small cap stocks are up an impressive +9.1% so far this year—one of their best starts to a year on record. And as markets factor in higher expectations for growth and inflation, U.S. 10-year Treasury yields have now risen ~20 basis points since the start of the year (sitting at 1.10%).

But let’s talk about the elephant in the room—what’s going on in Washington?

  • President-elect Biden unveiled his big $1.9 trillion fiscal stimulus plan. Some of the main components of the plan include $1,400 direct payments to individuals, more robust unemployment insurance, $350 billion in aid to state and local governments, and $400 billion to combat the virus (including testing, vaccinations, healthcare jobs and reopening schools). Biden also called on Congress to increase the minimum wage to $15 per hour.

    Our take: We view this plan as an opening bid for negotiations, with the final deal likely much smaller and in the ballpark of $750 billion. The support could offer further aid to millions of unemployed Americans and ailing businesses—after all, last week saw another 965,000 Americans file for unemployment. Policymakers will be under pressure to pass a package swiftly (we’re penciling it in between March and early April, just as existing unemployment insurance support expires). Importantly, another round of fiscal stimulus has implications for our outlook, namely a quicker return to 2% inflation, modestly rising interest rates and a weaker dollar. Investors should still be wary of cash, expand their toolkits to find yield, and expect stocks to outperform bonds.

  • President Trump was impeached by the House for the second time. The vote came in at 232-197, including 10 Republicans.

    Our take: While the impeachment vote passed in the House, the trial in the Senate might not occur immediately. For one, given the Senate is currently in recess, the earliest a trial could start is on January 20—after Trump has already left office. And it’s unclear whether one would take place shortly after the inauguration or several months down the line. Last, it’s also worth noting that some are calling the legality of a post-term trial into question—there is precedent, but not since the 1876 impeachment trial of Secretary of War William Belknap.

  • In its final week, the Trump administration blacklisted another nine Chinese companies for alleged ties to the Chinese military. The companies, which include smartphone maker Xiaomi and plane maker Comac, join another 60 that were added to the list last month (which included Alibaba, Tencent and Baidu). While wording of the executive orders are fraught with vague language, U.S. investors must unwind positions in these companies by November.

    Our take: Some of these companies are sure to be impacted, but when it comes to the Chinese tech giants Alibaba, Tencent and Baidu, the United States is reportedly no longer planning to include those names in the restriction. Together, the market cap weights of Tencent (14.9%), Alibaba (14.3%) and Baidu (2.1%) amount to ~30% of the total MSCI China Index. And even when under the threat of regulatory pressure and other restrictions, the MSCI China Index returned nearly 30% in 2020—significantly outperforming the MSCI World’s +16% (in U.S. dollar terms).  


With a new presidential agenda about to take hold, policymakers hard at work and vaccine distribution underway, we’re focused on the path ahead. Since releasing our 2021 Outlook, returns across geographies have been quite strong, and the questions have been flooding in. Given the backdrop, the rest of this week’s Top Market Takeaways is dedicated to the top queries we’ve received so far.


You ask, we answer

Q: First of all, it kind of feels like the equity market is in a bubble. How do you know it’s not?

A: Well, hindsight is 20/20. That said, we don’t think the equity market is in a bubble. The returns we’ve seen are actually just in line with what we’d expect, given the momentum in both sentiment indicators and hard economic data. 

Sure, valuations are elevated, but we think there are good reasons for that: stellar earnings and cash flow generation, given the economic circumstances and historically low interest rates. And even though valuations are above average (almost 20% of large cap stocks trade at a P/E ratio of 50x or greater), they are nowhere close to as concerning as they were during the DotCom bubble in 2000 (when 40% of large cap stocks traded at a P/E ratio of 50x or greater).  

We are watching positioning, sentiment and retail trading activity closely for pockets of excess, but on the whole, we do not think the stock market is exhibiting “bubble” characteristics. That said, we have to acknowledge that, given the rally over the last three months, it is getting harder to find clear bargains in equity markets. That means we are having to be more selective about what we want to focus on tactically.   

Q: OK, so where should we now invest our next dollars earmarked for equities?

We think these five areas may provide attractive returns for the next 12 months:

  1. Emerging markets and China: As the global healing process continues (albeit staggered and uneven), we think emerging markets stand to outperform. Add in the attractive mix of cyclical and secular exposures in the space, and performance recently has shown that the broad market can work even when there are specific regulatory hurdles facing Alibaba.
  2. Infrastructure: We expect an infrastructure bill at some point in 2021, and there is global support for more investment. This could be a further tailwind for industrial and material companies, as well as direct investments in infrastructure (for those suitable, of course).
  3. Decarbonization and sustainability: The Democratic agenda on clean energy investment looks likely to come to fruition. We are focused on electric vehicles, clean energy and the components that enable them (such as semiconductors).
  4. Pent-up demand: We think mass vaccination programs will make a big difference by the second half of this year. Commodities and companies linked to transportation, travel and consumer spending should benefit.
  5. Digital entertainment: Some pandemic activities are here to say. Streaming and gaming are two of them.  

Q: Wait, do you still believe in the megatrends?

A: Yes, but we need to acknowledge that the megatrends aren’t going to be the only growth game in town right now. As a reminder, our outlook called out three megatrends to drive growth in the years ahead: digital transformation, healthcare innovation and sustainability. Throughout the pandemic, earnings growth was scarce, and companies in all three megatrends, but especially digital transformation, commanded a premium because they kept growing. Now, as the global economy recovers, growth will be much more plentiful. That means investors will probably look toward areas of the market that have similar near-term earnings growth potential at lower valuations.

We are still tactically positive on sustainability and decarbonization (as we mentioned above), and we would also mention that healthcare innovation broadly is trading at much more attractive valuations than digital transformation.

Digital transformation will likely continue to define the global economy over the medium term, and maintaining exposure is important. But at this stage, we prefer to express this trend by investing in smaller companies, rather than relying on the continued dominance of the current mega cap leaders.

Capitalizing on megatrends is not about investing in the current winners, it is about identifying the winners of the future before the market does.

Putting it all together: At the most basic level, our view is that the global economy will continue to gradually heal from the pandemic and the economic damage that lockdowns caused. We believe this, along with supportive monetary and fiscal policy, will drive broad equity markets to all-time highs. As we said in our 2021 Outlook, embrace the optimism.

All market and economic data as of January 2021 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice


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  • The MSCI China Index captures large- and mid-cap representation across China H shares, B shares, Red chips, P chips and foreign listings (e.g., ADRs). With 459 constituents, the index covers about 85% of this China equity universe. Currently, the index also includes Large Cap A shares represented at 5% of their free float adjusted market capitalization.
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