WHAT ARE THE KEY TAKEAWAYS FROM THE FIRST QUARTER OF 2021? WHAT IS THE BEST INVESTMENT STRATEGY IN THE CURRENT ENVIRONMENT?

THOUGHTS ON THE QUALITY OF FOURTH-QUARTER 2020 EARNINGS IN THE UNITED STATES

The earnings season in the United States is drawing to an end on a far better note than expected. The fourth quarter 2020 earnings released by the vast majority of S&P 500 companies topped analysts' projections. Earnings per share rose by 5.2% year-on-year on average during the quarter, as opposed to a FactSet consensus compiled prior to the earnings season that saw EPS shrinking by 8.4%. What's more, 58% of companies even reported higher earnings per share than in the fourth quarter of 2019. For example, American IT heavyweight Accenture has just announced strong growth in earnings and a record $16 billion order book, up 13% on the level recorded in the first quarter of 2020! Accenture estimates that customer demand has already returned to the 2019 levels seen before the public health crisis, and has raised its growth forecast for 2021. Similarly, our discussions last week with the senior managers of Europe's leading semiconductor manufacturers STMICROELECTRONICS and INFINEON revealed that they were upbeat for 2021. Business is being driven by the momentum in all the end-markets they address: industry, automotive, 5G, medical equipment, renewable energy, etc. This prompted Infineon to raise its 2021 revenue forecast in early February from €10.5 billion to €10.8 billion. For the record, 2020 revenue amounted to €8.6 billion.

CAN WE EXPECT TO SEE A SHIFT IN INTERNATIONAL POLICY WITH THE NEW BIDEN ADMINISTRATION?

While tensions between the Biden administration and Russian and Chinese leaders have been mounting in recent days, this is in stark contrast to relations between the US and European Union Member States, which appear to have improved significantly.
The new US President is making no secret of the fact that he wants to rebuild ties with Europe.
It only took a matter of months to end a 15-year-old dispute! Following a telephone conversation with Joe Biden, European Commission President Ursula von der Leyen said in a statement: "As a symbol of this fresh start, President Biden and I agreed to suspend all our tariffs imposed in the context of the Airbus-Boeing disputes, both on aircraft and non-aircraft products, for an initial period of four months. [.] This is excellent news for businesses and industries on both sides of the Atlantic, and a very positive signal for our economic cooperation in the years to come." This agreement temporarily does away with the tariffs that Washington had introduced on $7.5 billion (€6.3 billion) in European exports to the United States, notably on foodstuffs (including wine, but excluding champagne and cognac). By the same token, it also removes the European tariffs on $4.5 billion of US goods. It is expected that this truce will be used by negotiators on both sides to find a solution to the trade dispute.

FEWER BARRIERS ACROSS THE WORLD BY THE END OF 2021? WHAT IS THE BEST INVESTMENT STRATEGY IN THE CURRENT ENVIRONMENT?

A supportive economic environment

Despite the virus, which is unfortunately still circulating, investors are looking to the medium term in the hope that the global economy will fare much better in the second half of 2021 and especially in 2022. Their confidence is helped by the fact that the central banks wasted no time in providing support for the economy and are prepared to inject hundreds of billions back into the financial system if needed.

The matter of the return of inflation

The return of inflation has become a focus, as it fuels a trend of rising bond yields and is decisive in shaping future monetary policies. For the OECD, underlying inflation will rise but remain moderate due to the current excess capacity around the world. It is also worth stressing that structural disinflation factors remain, such as the digital transformation of the economy and the ageing population in the developed world. We should not read too much into the recent fall in jobless numbers in the United States and the risk of increasing prices that this could trigger. According to Patrick Artus, Chief Economist at Natixis, "it has been accompanied by a four-point drop in the labour force participation rate [some unemployed people are stopping their job search and are being removed from the statistics]".. "With each recovery, expected inflation is overestimated and yields overreact." Against this backdrop, the much-anticipated Federal Reserve and European Central Bank meetings have been held in recent weeks. The narrative among central bankers on both sides of the Atlantic was restrained and they decided to stick to their accommodative monetary policies to support the rebound of their economies. The Fed chairman said that rates would be kept within a target range of 0% to 0.25% until such time as the US economy returns to "a state of maximum employment" and inflation reaches a sustained level of 2%. In Europe, the ECB even decided to expand its asset purchasing programme from €80 billion to €100 billion a month in an effort to rein in the hike in long-term interest rates in the Euro area.

Continue to buy at market bottoms

By and large, therefore, the earnings releases have been reassuring. Investors have not donned rose-tinted glasses after all, but there has been no widespread market bubble either, just some mini bubbles possibly here or there on isolated stocks. On the one hand, most growth stocks, particularly medtech and tech stocks, have delivered often-impressive annual earnings. After coming out winning from the crisis, these companies could be set to do very well in tomorrow's world also... On the other hand, some cyclical firms are benefiting from an upturn in industrial activity, and many banks are faring better than expected. This lends weight to our view, for the first part of the year, that it is worth pursuing a more balanced strategy between growth stocks that will be driven over the medium term by major societal trends, and cyclical industrial stocks that will benefit in the near term from the current recovery. To sum up, we still advise investors to buy at market bottoms, as we have done since the early November 2020 announcement that the Pfizer-BioNtech Covid vaccine provided a high level of protection. As things stand, now that long rates are gradually aligning with their pre-Covid levels, there could well be room to go higher in an environment in which the markets and businesses are being buoyed by government support measures and the central banks' accommodative monetary policies.

Completed on 22 march 2021

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