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Multi-Asset Investments Overview

An overview of opportunities on the equity and currency markets. Europe is seen vulnerable ahead of the German and French elections, while the US and China are seen polarising the world.

As the world prepares for a post-pandemic financial order, inflation is on everybody’s lips. The 10Y, 5Y and 2Y outlooks in the chart below show the declining trend prior to the COVID-19 pandemic and the abrupt rise in inflation expectations thereafter.

This is to be expected, considering the extent of unconventional monetary tools used by central banks around the world. Because all central banks have injected massive volumes of liquidity into the financial system, inflation should be rising in all economies. But it isn’t…

As long as the US dollar remains the world’s reserve currency, the Fed will have an easier job controlling inflation than other central banks in the developed world have. This was proven in the years following the 2008-2009 financial crisis, when the Fed was one of the few central banks that managed to normalise policy due to rising inflation.

Higher asset prices have led investors and money managers to reassess their views regarding multiple asset classes. Here’s what to keep an eye on for the rest of the trading year, assuming the pandemic ends sooner rather than later.

Equities and Currencies

UK large-caps are an attractive play in the context of the economic reopening and in a post-Brexit world. The country has managed a remarkable start to the trading year, mostly fueled by a successful vaccination campaign. As such, the British pound will likely remain bid against its peers.

Structural growth trends will likely favour some Asian tech giant corporations. Asian countries, while not benefiting from the development and distribution of vaccines, have still managed to contain the virus. In a tech-driven world, their lead should accentuate, and thus Asian currencies such as the Japanese Yen may turn bid against Western counterparts.

US equities remain bullish. This will persist as long as the Dow remains close to all-time highs, corporate America’s earnings are at record highs, and the Fed retains its accommodative stance. Therefore the US dollar may remain bid against emerging market currencies, and trade with a mixed tone against G10 pendants.

With Europe wounded by Brexit and facing uncertainty ahead of German and French elections, the euro remains vulnerable. As such, the world will be polarised by the other two powers – the United States and China – as the global supply chains are re-designed to accommodate the new thinking about globalisation.

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