Stefan Hofer, LGT Bank
The family-owned Liechtenstein private bank estimates that there are $1.5trn of excess savings representing pent-up household demand, which could fuel a spending splurge by people who want to return to the ‘old normal’.
“There could a massive rebound in consumer and business activity in the second half of this year, as the pandemic slows and vaccines are rolled out,” said Stefan Hofer, Hong Kong-based managing director and chief investment strategist at LGT Bank Asia.
Although markets might experience short-term corrections as investors react to temporary glitches with vaccine delivery or fears about new strains of the Covid virus, “the longer-term upward trend for risk assets remains intact,” he told a media briefing this week.
Hofer’s faith in people intending to revert to pre-pandemic economic and social behaviour is in contrast to other investment strategists, who argue that there is no turning back.
For instance, Deutsche Bank International Private Bank’s global chief investment officer, Christian Nolting, recently said that the Covid-19 pandemic, mandatory lockdowns and more intrusive state intervention have had profound effects on social and economic activities, accelerating trends already underway and exacerbating problems that require new responses.
“In our daily lives there is no return to the status quo ante the pandemic,” he told a media briefing last month.
But, in an environment where people are going to swarm shopping malls, restaurants and airports, “there is greater upside for high beta, cyclical assets”, and the best opportunities exist outside of the US whose heady markets have been driven by tech and new economy themes, according to Hofer.
Hofer recommends overweight allocations to Europe and Japan, and his preferred sectors are healthcare, communication services, information technology and materials.
LGT forecasts earnings per share growth this year of 34% in Europe (ex-UK), 49% in Japan and 24% in Asia (ex-Japan).
Hofer is neutral about the US and Asia ex-Japan, and to the energy, consumer discretionary, industrial, financial and property sectors. Hofer is underweight emerging markets in Latin America and Europe, Middle East and Africa, and he doesn’t like the utilities and consumer staples sectors.
Meanwhile, foreign exchange rates should support overseas equity allocations for US dollar-based investors.
“The dollar is likely to continue its weaker trend as US interest rates remain low, while the euro (which is historically cheap), yen and other Asian currencies should strengthen, despite recent efforts by central banks to depress their foreign exchange rates to help exporters,” said Hofer.
In fixed income, Hofer tilts towards high yield (sub-investment grade) credit, especially with issues with medium duration, recommends avoiding low yielding developed market government bonds and as well as long duration securities in general, while having a neutral stance towards investment grade corporate fixed income and cash equivalent instruments.
“However, even high yield corporate bonds are unlikely to generate returns of more than 3-4% this year, so investors are better off with equities,” he said.
Among alternative asset classes, Hofer has no clear favourites. While he is comfortable with gold and Reits at current valuations, he is negative about the energy sector until there are clear signs that global economic activity is recovering.
The key danger to LGT’s positive outlook for risk assets is a sudden pick-up in inflation, although Hofer believes that central banks – including the US Federal Reserve which has target 2% inflation – will tolerate price increases if there is a concomitant increase in employment.