Real Vision: The Golden Age of Asset Allocation
Real Vision: The Golden Age of Asset Allocation

Jay Pelosky joins Real Vision managing editor Ed Harrison to discuss his macro outlook for 2021. Pelosky shares the areas of opportunity that are on his radar, including high-yield bonds, and equities in Europe and China. Harrison asks Pelosky to update his positive thesis on small-caps equities and emerging market stocks, which have been on a tremendous tear for almost two month. Pelosky explains why despite their frenetic upsurge, he remains bullish on these asset classes as well as other assets that benefit from an increase in growth and inflation. Lastly, Pelosky tells Harrison why the reflation that he expects to see in 2021 will be a drag on sovereign bonds, particularly U.S. Treasurys. Filmed on December 15, 2020. Key learnings: The rotation from growth stocks into value equities is just getting started. Reflation and re-opening will further boost stocks, specifically small-cap and emerging market equities.

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As The Tri Polar World Turns: 2021 Outlook - A Golden Age for Asset Allocation

Executive Summary

Don't be misled by November's stock market surge - over the past three months ACWI is up 5%, led by ACWX up 9%; the US trails badly with S&P up less than 3%. Covid 19 vaccines worth much more than that as we will see in 2021.

Best get used to that US underperformance. As noted on BTV November’s advance represents the first innings of a multi year equity bull market underpinned by a synchronized global economic BOOM, the likes of which haven't been seen in roughly 50 years.

Vaccines, record global liquidity, the melding of fiscal and monetary policy & the rebirth of the global consumer fueled by a mountain of excess savings reinforce the global boom.

Expect a “golden age” of global asset allocation as the Great Rotation unfolds across assets, regions, countries, sectors, factors & styles.

Overbought conditions and euphoric sentiment suggest a healthy pullback ahead which should be used to ensure proper positioning. Risks include: fiscal fatigue, political miscalculations & miscues in the vaccine rollout. Absent vaccine related fatalities pullbacks should be bought.

HEALTH

Speed is Covid 19’s signature. Vaccines in less than a year vs the normal decade long process reflects the speed of science. Speed of delivery comes next & will leverage the global logistics system. Expect mass vaccine acceptance as 1st responders are successfully inoculated. It is often darkest before the dawn - that's true today with Covid. Next 3-6 months will look very different.

ECONOMICS

Global growth is likely to be 6%+ next year (MS expects 6.4%). 2022 will also be very robust as Central Banks let inflation run hot via AIT. Excess savings = to 7-10% Global GDP support consumption; vaccines stimulate the service sector to catch up to manufacturing. Both China and the US will support their working classes. Inflation will surprise to the upside.

POLITICS

Pres. Elect Biden’s DC knowledge, the situation he inherits + the economics team he has assembled suggests a much more aggressive and progessive Admin than many expect - even with a split Govt (TBD). Partisan gridlock, appealing to some, simply leaves the US/Americas further and further behind in a rapidly integrating Tri Polar World led by Asia and Europe. Expect the EU's Next Generation plan to be put in place coupled with a deal on Brexit. Europe has a chance to win the 2020s, execution will be key.

POLICY

Health policy leads, fiscal policy follows, monetary policy in 3rd place. It's a new world. Biden likely to go big on fiscal stimulus around infrastructure & climate with focus on full employment - makes both economic and political sense. EU Green Deal/JRF likewise ties fiscal and climate together - joint issuance > joint taxation > EU safe asset. Common deposit insurance next followed by banking union & cross border M&A. RCEP boosts Japan, reinforces Asian supply chains, puts China in Asian integration driver’s seat.

MARKETS

Death of global macro? Hell no. Golden opportunity for asset allocation/thematic to add alpha. Global economic boom suggests Equities and Commodities have best upside while long bonds end a 40 year bull run and enter a bear market. Look for 10 yr UST to yield between 1.5-2.0% in 12M > Tech “kryptonite”. Great Rotation is more than just a trade: favor non US equity, Europe-Japan, Cyclicals/Value, Small Caps, Asia and Lat Am in EM. Valuation fears overdone with EPS growth of 25% +. Tech tainted ESG at risk. Fixed Income focus: Credit (HY), Prefs, EM $ debt & Commercial Real Estate. Death of the office dead wrong. Industrial metals, energy (clean and old), precious metals too. Dollar down, regional FX blocs: Asia & RMB, EU & Euro, Americas & USD starting to form.

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As The Tri Polar World Turns - Clarity Cometh - Are You Ready?
As The Tri Polar World Turns - Clarity Cometh - Are You Ready?

Executive Summary

Clarity on the Big Three issues: US stimulus, elections, and vaccines is coming quick. Expect clarity to result in sizable cross asset price shifts, stimulate the equity Rotation Trade & capsize the long bond bull market.

US stimulus a when not if question. Sizing depends on election outcomes; polling suggests a Democratic sweep (Blue Wave) and a sizable fiscal package (think House bill $2T) early in 2021. Speed of science suggests at least one approved vaccine shipping before YE.

Continue to expect a global economic BOOM in 2021 led by record liquidity, further stimulus, and vaccines. Covid upends the experience economy & stimulates the buy stuff economy. Watch for inflation scare, expect sharply higher UST rates at the long end. Rates are the fulcrum for the Rotation Trade, a trade both sectoral/style & geographic in nature.

Risks center around contested US elections, US Govt gridlock, fiscal fatigue in Europe.

HEALTH

Expect Pfizer Phase 3 trial results in coming weeks, Moderna in Nov, China candidates around the same time frame. Production underway in all cases, distribution to leverage logistics advances of the past decade. Cases high, deaths much lower result in US/EU targeted lockdowns. Staggering Asian Covid outperformance.

ECONOMICS

2021 Global economic boom built on record global liquidity & AIT, IMF approved fiscal stimulus, robust US - Chinese consumption & vaccine success. US stimulus sizing election dependent. Europe must avoid fiscal fatigue & execute on policy. China is the only major economy to grow in 2020.

POLITICS

Biden lead in place for months - electorate looking for a safe pair of hands post Covid debacle. Massive early voting tilts Democrat. Will Republican lead in new voter registration make a difference? Expect results by Nov 4th. Senate the main focus - US gridlock V problematic in a fast changing world.

POLICY

Monetary policy led by AIT, how high will the Fed let long rates rise? Fiscal policy in the driver's seat. Biden's plan scores as pro growth. Demand for EU joint issuance suggests hunger for EU safe assets - execution is EU key. China’s DCS and RMB strength provide both domestic & global economic support.

MARKETS

Clarity on Big 3 brings money off sidelines, catalyzes equity Rotation Trade & capsizes FI long duration bull market. Prefer Cyclical/Value, non US DM equity. Watch for Tech “kryptonite”. Cross asset pricing is just starting to reflect these new realities… much further to go - avoid “duration complacency” at all costs! Potential for much wider equity price swings than expected given months of range trading. Expect USD weakness and commodity strength, old energy could be a mispriced opportunity.

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As The Tri Polar World Turns - Self Inflicted Wounds

Executive Summary

Has A much needed and healthy risk asset correction may turn into something more malign given US centric, self inflicted wounds. Regime changes are in train across the board: equality, climate, policy, politics & thus markets.

Fed Chair Powell begging Congress for more stimulus while the US President questions the peaceful transition of power is, shall we say, not a good look. Yet all is not lost. While we wave goodbye to the Fed put we say hello to the Mnuchin plunge protection team - down 10% and the call goes out.

US equity risk reward seems poor going into a contested election with Tech exposed to vaccine “kryptonite”. Rotation interrupted, not reversed; post election stimulus likely. We remain with a Cyclical/Value tilt and non US equity bias. Long duration Sov debt at risk to a mini taper tantrum & possible bear market. We are dollar sellers on the bounce and continue to favor Commodities including industrial metals/miners & clean energy.

HEALTH

Good news, bad news. The good: rapid testing is here and vaccine trials remain on track for a vaccine in coming months. Bad news: US has abdicated on the federal level and case levels are rising sharply in parts of Europe. Better Covid control through science is coming fast & will upend portfolio structures.

ECONOMICS

Good news & bad. The good: a global synchronized upturn is underway, supported by record setting global liquidity. The bad: more, politically difficult, fiscal support is needed, especially in the US. Regime change is never easy.

POLITICS

Political risk is US centric - any Qs, ask President Trump. BIden’s lead has been constant for much of the past year. Better polling quality & no 3rd party candidate suggests it's his race to lose. Surprise would be a smashing, Election night, Biden win - watch Fla.

POLICY

We have entered both Peak Central Bank territory & the more politicized world of Fiscal Policy. China’s DCS, Europe’s furlough program & US pandemic support all the same policy - support/grow consumption. China, Germany, US drive the Tri Polar World of Asia, Europe & the Americas.

MARKETS

Tech selloff clears the froth away. Rotation trade (both sectoral/style & geographic) remains the focus. Imminent vaccine, synchronized global recovery & abundant liquidity support risk assets on a 12 month basis. New inflation regime to impact pension, risk - parity, 60-40 funds. Regional FX blocs centered around USD, Euro, RMB coming into focus.

Much, much more inside.

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