Strategists see upside for equities from broad economic rebound


SINGAPORE – Market turbulence continued through last week with sentiment swinging between euphoria over potential economic recovery and fear over inflation.

United States President Joe Biden’s US$1.9 trillion (S$2.6 trillion) Covid-19 rescue package fuelled hopes of supercharging the economic recovery, while also stirring up concerns that adding more liquidity to a system already floating on some US$4 trillion of cash could further add to inflationary pressures.

Treasury yields, especially that of the 10-year bond, continued to trend upwards, testing the key 1.6 per cent levels.

The number of people making initial for benefits fell the previous week to its lowest level since the pandemic, but US consumer prices rose by just 0.4 per cent last month, in line with expectations.

Despite inflation concerns, most market strategists see an upside for the equity market in the foreseeable future, largely supported by a broad economic recovery.

Here is how BlackRock put it last week: “Nominal yields have been climbing since September, but the magnitude has lagged that of the rise in inflation expectations during the period. Inflation-adjusted yields remain deep in negative territory – in line with our new nominal theme. We still believe the new nominal will support equities and risk assets over the next six to 12 months.”

On Wall Street, the Dow Jones index and S&P surged to new record highs. But the tech-heavy Nasdaq had a roller-coaster week, bouncing off a low at 12,600 to end the week at 13,319.87 points.

Here, the Straits Times Index (STI) ended the week flattish at 3,095.22 points.

But the past three have seen the STI rally 8 per cent, bucking the 3 per cent declines of the broader regional indices. As Mr Geoff Howie, head of research at SGX, noted, the three local bank stocks have been a key part of this, averaging 10 per cent returns, more than the median gain of global banks over the period.

“Stabilisation of the 10-year US Treasury yields did see DBS and UOB come off their intra-week highs by 3 per cent and 2 per cent respectively, while OCBC held the most ground, ending the week nine cents off its $11.82 intra-week high,” he noted.

Yangzijiang Shipbuilding pushed through its January 2020 highs last week, with net institutional inflows propelling the stock to an 83-week high at $1.22, before ending the week at $1.20. The stock has seen close to $40 million of average daily turnover this year, up 50 per cent from 2020 levels, with an 80 per cent correlation to the price of Brent crude oil since the end of October.

So what is ahead for the market?

This week will be important as markets await the outcome of the US Federal Reserve’s monetary policy meeting on Tuesday and Wednesday.

US bond yields have been rising on inflation expectations and the markets will be waiting to see what the Fed has to say about the outlook for the economy and inflation. Will it signal earlier monetary tightening compared with its forecast last December?

That was when the median forecast among Fed policymakers showed no rate hikes for the next three years based on inflation remaining within its 2 per cent target through 2021 to 2023.

Mr Vasu Menon, executive director for investment strategy at OCBC, expects the Fed funds rate to remain unchanged and for the central bank to maintain an accommodative policy until the economy is firmly back on its feet, the job market shows substantial improvement and inflation shows a sustained pickup.

But he warned that the Fed could act if this year’s surge in 10-year Treasury yield to above 1.5 per cent becomes “disorderly” and threatens the US recovery.

“At this juncture, Fed chief Jerome Powell doesn’t seem to think that the rise in bond yields is disorderly and poses a threat to financial conditions in the US, based on what he said at a webinar earlier this month,” he said.

Also, at current levels, the US 10-year Treasury yield is still below pre-pandemic levels of around 1.9 per cent and real yields are still negative, he added.

Meanwhile, the Covid-19 vaccine roll-out, sequential economic recovery and abundance of liquidity will continue to support the market, he said.

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