[In a Letter to Weekly on Stocks]TPW’s Jay Pelosky expects a Great Rotation away from U.S. to non-U.S. equity markets
By Jay Pelosky, Co Founder & Chief Investment Officer, TPW Investment Management
Li Jian (edi.) & Ge Lin (edi.)
Happy New Year to Weekly on Stocks, its readers and all Chinese people & investors! Let us hope that as the well-named Year of the Rat recedes, the Year of the Ox with its associations of stability, nourishment coupled with positivity and trustworthiness will be a year of positive investment returns, good health and much happiness!
I expect a global economic boom in 2021 and 2022 with the best global growth in almost 40 years, as vaccinations defeat Covid-19 and continued fiscal and monetary support underpins the recovery. Consumers in Europe and the U.S. have shaved huge savings and we could be surprised by the amount of consumption in the second half of this year.
I expect some inflation to happen especially in the U.S. as the economic recovery leads to supply–demand issues. We are already seeing such issues in the semiconductor space. But the inflationary pressure will be limited and transitory. I expect the Fed and the European Central Bank to allow some inflation to occur as both seek to offset years of below-target inflation – they call it Asymmetric Inflation Targeting (AIT). I also expect the Chinese economy to do quite well as it focuses on domestic consumption and technological self-sufficiency.
I expect the global economic boom to result in a Great Rotation away from the U.S. to non-U.S. equity markets in both Developed and Emerging Markets. The Great Rotation would lead to a “Golden Age” for asset allocation. The U.S. equity market has been the best performing market since the Great Financial Crisis in 2009; I believe this is already starting to change as shown by China’s outperformance last year. I expect equities to do better than bonds and believe the U.S. Treasury bond market will enter a bear market. I expect commodities to do very well and the Chinese yuan to continue to appreciate. Investors should be underweight bonds and overweight equity, commodities and alternative assets.
I also expect cyclical sectors such as energy, materials and financials to do better than big-cap U.S. tech stocks that would suffer from the end of Work From Home and rising rates. I expect small-cap stocks to do better than large-cap. I continue to like old and new energy, industrial metals as well as precious metals. I have been developing exposure to themes such as climate change, EV, cyber, fintech and crypto as I expect these areas to add alpha. The speed at which global financial and intellectual capital came together to create a Covid vaccine will be replicated now in the race to net zero emissions. This is a huge opportunity for investors now and in the coming years.
I like real estate and believe that those saying the office is dead are wrong. I continue to favor China equity in its tech, health, consumer and climate spaces. I favor credit over government bonds though I think the Chinese government bond market is very appealing given its 3% yield and appreciating currency.
I have enjoyed working with Weekly on Stocks – it has dealt with me in a very professional and responsive manner that I greatly appreciate. I was proud to see my name and face on the cover of the 2021 Outlook edition. I look forward to continuing to work together in the Year of the Ox!
I would encourage Chinese investors to begin to learn about the non-Chinese markets and prepare to diversify their holdings in the years ahead. I also encourage investors to think thematically – not only across stocks and bonds but also across themes such as climate, cyber, genomic, fintech, innovation and crypto. The last decade has been a great period for investing, especially in the U.S. with bull markets in both stocks and bonds – going forward it is going to be harder to generate returns as U.S. treasuries enter a bear market and U.S. stocks are already fully valued. I believe thematic investing via ETFs can add alpha to one’s portfolio.