Exposure rates of the Dorval Asset Management Range – 8th January 2021

2021 will be characterized by the rush to roll out vaccination campaigns on the one hand, and endeavors to revisit pre-crisis economic activity as soon as possible on the other.

In the United States, this scenario has now garnered greater credibility as the Senate has moved into Democrat hands, eradicating the risk that fiscal support for the US economy could suffer a premature demise.


Congress moves into Democrat hands,
and economists upgrade US growth projections


US GDP and Goldman Sachs projections


After the two runoffs in Georgia on January 5, the US Senate has now moved into Democrat hands by a hair’s breadth. This majority is probably not solid enough to steer a clear shift to the left, which could well trigger a major hike in corporate taxes. However, these elections do herald the end to the threat of a Republican obstruction to the stimulus packages that Democrats are planning, including fresh checks for households and jobseekers, support to US states that have notched up debt due to the crisis, and infrastructure spending. This state aid, combined with the expected effects of massive vaccination programs, should drive an approximate 7% jump in US GDP between 4Q 2020 and 4Q 2021 (cf. chart 1), with unemployment set to dip below 5% again as a result in the second half of the year (vs. 6.7% in December 2020). Bar any major problems, such as a potential persistent presence of the epidemic despite vaccines for example, it looks feasible to expect a return to full employment in 2022.


Flexing of these fiscal muscles summoned to stage an economic recovery helps ease the pressure on monetary policy. However, the Fed will still not hike interest rates as it seeks to revisit inflation of at least 2% on a sustainable basis. Yet investors have already started speculating on the timeframe for the central bank to slow its treasury securities purchases, perhaps at the end of the year or in 2022. The Fed will definitely take a highly reassuring stance over the months ahead, but the yield curve has already started to steepen again, with the 10-year edging up above 1% (cf. chart 2), and the 30-year moving close to 2%. It is worth remembering that this trend to a steeper yield curve is particularly good news for US banks.


Long-term yields take upturn in the US, but not in Europe
10-year sovereign bond yields

United States / Germany
US-Germany differential


However, we have not seen this same surge in long-term yields in Europe, where investors still harbor doubts on governments’ ability to produce the same Keynesian stimulus as in the US, despite the hard-fought €750bn package hammered out last year. The principle behind the European program is to promote inherently gradual investment expenditure, rather than distribute income to households and companies geared to driving a robust recovery in consumer spending and jobs. After Germany temporarily cut its VAT rate in July 2020, the country has just put the figure back up to its pre-crisis level as of January 1, 2021. Unless Europe manages to carve out some fresh leeway, then the continent’s economic recovery in 2021 will hinge more heavily on the success of the vaccination program as compared with the US. However, we do note that the economy in both France and the countries of southern Europe will benefit more than others from the near-full opening of the economy expected from this summer (or before), as the tourism sectors account for a heftier weighting there than elsewhere. This will obviously also be the case for other major tourist destinations worldwide i.e. Thailand, Turkey, etc.


Cyclical stocks have massively outperformed defensives
Ratios for cyclicals vs. defensives, Goldman Sachs baskets (average US/EU/JAP)



These various changes and expectations are now broadly priced in on the financial markets. Cyclical stocks have posted a stellar outperformance vs. defensive stocks since May (cf. chart 3). Meanwhile growth stocks – some of which are also cyclicals – continue to put in solid showings, contrary to the urban myth that their performances hinge primarily on long-term interest rates.


We have gradually started to cut back our exposure given the swift upswing on the equity markets, with a view to recovering some leeway in the event of a market correction (profit-taking). We have almost entirely run down the remainder of the bond portion in our global funds. Other reasons why we are slightly reducing our exposure also include the difficulties in singling out safe haven stocks or securities that are decorrelated from the equity markets at a reasonable price. Our investment themes still remain based on the expected robust economic recovery.



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