News

• The global economy is now heading into a more mature phase of the cycle, with a slowdown in growth from 5.6% this year to 4.6% in 2022 due to supply chain disruptions and the Chinese economic downturn.
• The bank has also highlighted that when it comes to inflation, it is important to understand that "transitory" does not necessarily mean "short-lived". Prices will not come back into the central banks' comfort zone until the second half of 2022.
• This macroeconomic outlook, coupled with a gradual tapering of stimulus measures by central banks, augurs greater volatility ahead; it is advisable therefore to pare down the cyclical component of portfolios and increase the weighting of health versus consumer discretionary. The bank’s team also recommends preparing for a higher interest rate scenario by upping exposure to the financial sector.
• Banca March emphasises the need to adapt investment strategies to a constantly changing world, and the importance of holding exposure to sectors offering long-term growth potential. It adds that are opportunities to be found in the energy transition, technology and digitalisation, all sectors that stand to receive a substantial share of government support.
• Spain's GDP will grow by 5.5% this year and is set to recover to pre-Covid levels in mid-2022, buoyed by the gradual improvements in the tourism sector and the arrival of EU funds.

Spanish economy

The Spanish economy is set to emerge somewhat more slowly from the crisis due to its heavier dependence on the tourism sector; it will not recover pre-Covid GDP growth until mid-2022. Unlike the eurozone and the global economy, Spain is expected to enjoy faster growth in 2022 (6.4%) than in 2021 (5.5%). The impressive progress in vaccination rates in Europe will allow for the improvement already reported in the domestic tourism sector - overnight stays in August were up 8% versus 2019 - to extend to the international tourism segment. This outlook, coupled with the impending arrival of EU recovery funds, points to an upturn in Spanish GDP growth.

Inflation and monetary policy

The drastic increase in demand triggered by the great economic reopening coupled with the current inventory shortages is having an impact on supply chains, causing various bottlenecks and rising raw material prices. 

Banca March believes that the current inflationary pressure will be transient, but warns that it is important to understand that “transient” does not necessarily mean “short-lived”. In the US, for example, where prices are now climbing less steeply on some of the items that have contributed most to recent inflationary pressures, such as used cars, travel and hotels, inflation is expected to close the year at 4.4%. The US economy will not see a return to rates in line with Fed targets until the middle of next year. The eurozone, which is lagging about six months behind, is facing further price hikes before returning to rates of around 2% in April 2022. 

As for central bank strategy, Banca March expects to the gradual tapering of stimulus measures to continue. The bank expects the Fed to scale back its bond purchases as of November by $15bn a month until it phases out its current purchase programme of $120bn a month. In the eurozone, the process will be more gradual; it is possible that as of March, when the pandemic emergency purchase programme (PEPP) comes to an end, the ECB will continue to intervene in the markets via the APP. 

This monetary normalisation process after unprecedented stimulus measures is currently the greatest threat facing the markets. Uncertainty over the pace of stimulus tapering measures and the potential duration of increased inflation will drive up volatility.

Markets

Equity markets will continue to offer the greatest appeal, driven by improving corporate earnings which are now outperforming pre-Covid levels by 12%. The bank's team of experts says it is still crucial to adapt sector exposure levels to the phase of the cycle. Following the outperformance of more cyclical stocks in the first part of the year, they now prefer sectors that will benefit from a gradual rise in long-term interest rates, such as financials. The team also recommends seeking a more balanced positioning in terms of sectors, overweighting health versus consumer discretionary and investing in companies with market power in light of rising raw material costs. Finally, sectors which stand to benefit from the energy transition, the technology transformation and digitalisation will also outperform. It is important to be more selective, avoiding larger companies which could be more exposed to potential regulatory and tax changes. 

In fixed income, the team continues to prefer credit to sovereigns, and recommends keeping durations very short as they expect to see long-term yields climb over the months ahead, with US Treasuries set to yield 1.8% and German bund yields rising to 0%. As for emerging market fixed income, Banca March has sold off exposure to renminbi-denominated Chinese sovereign debt. Following the significant appreciation in the currency and ahead of a possible shift towards a more expansionary stance by the Chinese authorities, the team decided to take profits. 

Unlike publicly-traded debt, private debt is one of the team's star assets, as it allows them to harness the illiquidity premium and has historically seen fewer defaults at times of market stress as well as enjoying a swifter recovery.