Cyclical and value to benefit from the steady recovery in 2021. The equity sector is set for further growth, with a rotation towards value and cyclical stocks. Markets have already rallied sharply, thanks to huge political support, both fiscal and monetary. More recently, the Vix plummeted to 23 (from 40) just after the US elections. “This will induce investors to reinvest some of their high cash positions in risky assets as political uncertainty eases along with the equity risk premium,” underlined Generali Investments.
Not only. Earnings will continue to recover strongly over the next 12 months. Furthermore, Biden’s policy, despite the lack of a unified government, will be more “reflationary” than Trump’s: this will push US rates slightly higher and the yield curve will become steeper.
Progress on the recovery fund and vaccine development front is positive in Europe. China’s macroeconomic momentum is also favorable and investor positioning on equities is not yet high. The rotation of portfolios towards cyclicals and value in terms of markets (euro area, UK, Japan and emerging markets) and sectors (industrial, financial, materials, energy) can therefore continue, according to Generali Investments.
Fabrizio Quirighetti of Decalia however points out that “we should not be surprised if some inflationary pressures emerge”, wondering if, “thanks” to this virus that has forced central banks and especially governments to act in a coordinated way, there is no possibility to finally get out of the scenario of soft growth, zero inflation and low rates experienced in the last decade.
The authorities had to decide to turn the wheel and take a different path, as they hit the wall much faster than expected. “This crisis is not, therefore, a fracture, but a fantastic accelerator of trends, for better or for worse, at the technological, behavioral, environmental and economic levels. We will see if this happens or not in the coming months. In the meantime, we have positioned the our portfolios quite constructively for the high reflation scenario described above, “continued Quirighetti.
That means having significant exposure to equities and other risky assets, such as high-yield or subordinated debt, and underweight cash and government bonds, the Decalia expert suggested.
Quirighetti concluded. (All rights reserved)

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