David Chao, Invesco
After a short, sharp recession followed by a strong rebound, the global economy is in early-to-mid-expansion, according to David Chao, Invesco’s global market strategist for Asia ex-Japan.
As cyclical sectors such as banks, financials, consumer discretionary, travel, energy and commodities usually outperform in the early recovery phase, a continued rotation is expected into cyclical assets, he told media in a recent webinar.
“There is a valuation gap between cyclical and technology stocks. For example, US cyclical stocks trade at half of the valuation — as measured by price-to-earnings — of US technology stocks,” said Chao.
Invesco prefers equities over fixed income, while within equities, he likes non-US markets, including emerging markets, and especially Asia.
“We favour emerging markets because we continue to see a very high economic growth rate, and a long term depreciation of the US dollar,” said Chao.
“On the fixed income side, we are still overweight risky high yield over safer high-quality credit. Specifically, we like high yield bank loans, and local currency debt.”
He believes that Asian credit offers attractive yields relative to the US and other developed markets, both in corporate high yield and also investment grade.
“Risky credit tends to perform well during the acceleration stage of a new business cycle, and we are at the start of a business cycle that should last for a very long period of time,” he added.
“Also, local currency debt could be attractive given the prospects of a weakening US dollar against Asian currency.
“For example, the China 10-year government bond continues to have a healthy yield premium of 200 basis points over the US Treasury 10-year bond yield,” Chao said.
The biggest threats to the optimistic outlook are if economies are slow to lift lockdowns or if governments reduce fiscal policy support, according to Chao.
Other firms which are positive about risky assets includes JP Morgan Asset Management, Fidelity and Blackrock.
“The prospect of an effective Covid-19 vaccine being introduced [in 2021] should boost cyclical industries that have suffered most during lockdowns,” Victoria Mio, director for Asian Equities at Fidelity said in a recent webinar.