UBS Trending for February 18, 2021: Emerging markets, inflation, rates and population growth

UBS Trending for February 18, 2021: Emerging markets, inflation, rates and population growth

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day you give us thirty minutes and we give you the most up to the minute market insights intellectual capital and best ideas from UBS and beyond it's Thursday February eighteenth twenty twenty one let's find out what's trending today we start up this morning discussing what's happening in the emerging market space and what countries to keep your eyes on there will also talk with rich burns dean about his thoughts on the market momentum and chat about the implications of population growth and urbanization during our weekly thematic Thursday segment All on today's. UBS trending so glad you could join us today everyone thanks for being here I'm Anthony pastore so as action nation rollout continues around the world one of the sectors that investors are looking at during the global recovery is emerging markets joining me now to discuss this is UBS chief investment officer emerging markets America's Alejo Czerwonko. Alejo so nice to have you back on the show I and we haven't really spoken about Yemen a bit since the last time you were here you know it's something that we see the performance of emerging market assets has been. Pretty good so far for twenty twenty one how should investors understand this even in the context of this rapidly increasing these rates are treasury rates that we're seeing here in the U. S. at the ten year in the thirty year how do you kind of rationalize the to. Good morning Anthony and

excited to be here as usual. As you rightly point out it's been quite surprising emerging market assets have done white well so far this year. We've got emerging market equities- posting eleven and a half percent returns in US dollars. Outperforming the S. and P.

five hundred by six and a half percentage points. We have spreads from emerging market dollar bonds. Compressing that is risk premia coming down. And we have emerging market currencies behaving well B.

seventy the US dollar all of this in the context all rapidly increasing US treasury rates as you know one thirty we've seen a bear steepening more. In the US treasuries curve this means of course the fed keeps short and short end rates. Very low but the long end rates have increased by forty to fifty basis points so far this year historically. Rapidly increasing US treasury rates are not good news for have not been good news for emerging markets now. Why this time might be different for a number of research out first of all US interest rates are increasing fourth quarter quote there right reasons. They're increasing because the market is moving to expect more. U. S.

stimulus mostly you market the more U. S. fiscal stimulus. The by the ministration is clearly. Moving forward with a very sizeable fiscal package in the ballpark all one point five trillion dollars. And this is wind up growth and inflation expectations which is good for emerging markets. Second reason has to do with. The fact that

up the financing needs. From the emerging world B. seventy the rest of the world are contained. They. Are not the

same as the used to be current account that. Have moved to Karnataka Sir by and large. On the condemning how sex. These these more country has a current account surplus. At the aggregate is not living up.

Beyond its means right and we can conclude that emerging markets are not living beyond their means today witches are which is why they're less vulnerable to increases in cost of financing in the United States so this is. In and out to what's going on on thirty and let me just wrap up by saying that. The macro economic recovery in emerging markets is ongoing we're seeing that are pretty clearly in high frequency economic indicators that we track. Including

economic surprise indices purchasing manager indices retail sales and other so. They they synchronized global recovery is on the way and this includes emerging markets. Right and you know I'm glad we show that graphic a moment ago Alejo because you can truly see the difference between twenty thirteen when the taper tantrum was in full effect and then you've got what's happening right now and you could there it is you can see such a clear difference in the two different environments. So given that and

your explanation at the top there what is your outlook for opportunities in EM equities today. Of course- we think emerging market equities are well positioned to have. A good performance for the remainder of the year we are- recommending in most preferred- stance vis a vis the asset class and this is mostly to do with earnings growth. In a

context off a synchronized global recovery we believe emerging markets are able to deliver. Earnings growth for twenty twenty one north all. 30% year over year- and therefore when you look at this compare to what we expect for other large equity markets around the world it is superior and we think this can drive the outperformance. Of course there are a number of opportunities with then emerging market equities that we highlight.

Quite recently- we've started to realize that Russian equities for instance I have been- have not been able to benefit from the sharp increase in. Oil prices globally and this has to do with a lot of geopolitical uncertainty and geopolitical risk affecting the market but we think that now is that that is now priced in. And therefore look in six twelve months up within Russian equities can do particularly well. Taking into account also the dividend yield that this market offers 9% I this is among the highest dividend yields all in the- equity market anywhere in the world so with- geopolitical risks price in. Very high dividend yield and our people favorable outlook for. Oil prices in the next few months we think Russian equities are a good opportunity. Within emerging

market X. right great yeah I quite certain as we look down the road towards the recovery following the pandemic it seems like there are. A lot more opportunities opening up especially in the EM world I want to jump over the policy with you Alejo something that was a sticking point during the election and even you know obviously before the election was a relationship with between the US and China. Now that

president Biden is in office you know he and his administration are still trying to figure out how they're going to proceed with our relationship to China what are you expecting there and how does that. Affect your stance on China as an investment opportunity. That's right underneath it you said it very well the Biden administration is still trying to figure out. How it will approach. China right it's still not clear.

Some things we believe will change- the overall tone of the relationship the approach to be savvy how to tackle- this bilateral. This bilateral ties. Biden will most likely- I adopt a more rules based approach over a discretion based approach and Biden will most likely. Get closer to our allies- in order to tackle the China the China topic yet. It is very unlikely we think on the need that they relationship between the US and China would improve meaningfully from here words. Yeah facing a secular great power struggle that is not going away anytime soon. R.

but it is particularly important in this context for investors to. You know have a portfolio that is resilient enough to withstand it. You know brought number all of possible scenarios and therefore we do think that investors need to allocate capital of course to the United States but- not not forget about China because- you don't know exactly what the future work will bring. It is our in

our analysis. North Asia is a lot better position than they west. To grow strongly in the next few years it's coming out of it and then make up with a lot less damage in terms of. Economic activity and therefore. We continue to see opportunities for investors in in China in particular. Driven

by solid earnings growth dynamics and a little bit more visibility in the macroeconomic out right China has already recovered. To levels of economic activity seems pretty pandemic something that cannot be set off- of the west by by and large nor off the United States in particular today. Great en LA- if you were to kind of bucket this all together and you look at equities fixed income currencies- immunity what are some of the key risks to your constructive use on EM right now. Look I think number one

Anthony yes- everything that we don't know about the pandemic right. We do think the world has a much more powerful set of tools to attack back the pandemic right we've got eight eight well diversified portfolio vaccines a growing portfolio treatments yes there's a lot we don't know about new buyers variance. And we- this is this is the big the big unknown B. seventy date

global economic recovery in the outlook for emerging markets- dot said our basement scenario remains constructive. We see opportunities as I said before in emerging market equities and it's also important to highlight that- emerging market bonds it's a segment that we had been highlighting us a tractive or many months throughout twenty twenty and- twenty twenty one and now we have paper our expectations for returns. Often virgin market bonds in the context off rapidly increasing US treasury rates we still think it's a great asset class to have instructed portfolios that tactically- looking six months out everything returns are going to be muted. Because even in the context Office say stable spreads or stable levels of risk premia in emerging markets- rapidly rising US treasury rates- will will affect total return show we are neutral the asset class went when it refers to emerging market bonds. Particularly in

U. S. dollars. Great Alejo thank you for drop by so good to get insights on what's going on in the world of EM since we kind of focused on what's happening domestically more often so it's always good to get that insight from you Alejo Czerwonko UBS chief investment officer of emerging markets. America's good to see you Sir. Thank you. Thanks Alejo we'll see you soon so UBS's on social media you can follow us on linkedin Instagram Twitter and Facebook you'll find timely content from our best thinkers and intellectual capital that can help you make more informed investment decisions are you can also visit UBS dot com forward slash CIO related content from the chief investment office coming up we've got a lot to get to liquidity bubbles bitcoin we're taking a look at what's happening in the markets with rich bursting. When we come back stay with us.

Welcome back to UBS trending everyone I'm Anthony pastore eight for today's tip of the day visit UBS .com forward slash CIO for the latest market insights from the chief investment officer anti we've market commentary from the team. All the website you'll find it more recent reports and blogs as well as what's trending in the news right now her latest UBS house view reports the regional outlook recommended reading materials and more again that website to visit. UBS dot com forward slash CIO. It's time to

over thirty five thousand feet our daily macro look at a specific area of the markets and investing today we're focusing on the recent market highs were talking about what's going on with rates. We're talking about big goin there's a lot to get to today with my guest Richard burns Steen. From Richard Bernstein advisors CEO and CIO rich it's so nice to have you on the show with me today it's been a long time since we've seen each other in person but great to see virtually- you know and rich in spite of. All the volatilities markets have hit some highs earlier this week and it went through the Azam is you know it's kind of cold maybe a little bit but what's your view on where the markets. Stand right now Rachel specially as we're preparing for this economic recovery. Well at it's great to be with you in and- hello everybody- I think looked at them Anthony I think the market is a little bit bifurcated here. I think we've

got. A portion of market which is extraordinarily popular extraordinarily overvalued. Extraordinarily speculative anywhere you want to do it and then there's another part of the market. Which I would argue is much more fun to look fundamentally based. A provides better opportunities. And I

think that's kind of in the background in in people are thinking of low market. As opposed to understanding this bifurcated market in- the two almost discord worlds that are that are out there within the within the equity market. Yeah and it's an interesting it's interesting to see that the levels that were Weber reaching- considering where we came from just almost a year ago at this point. Something else obviously that's been on everyone's mind is bit coin. In it reached another high passing fifty one thousand dollars- just yesterday at its continuing to raise eyebrows what's- your take on all this rich in your your general position here. Right well you

know Anthony I'm kind of notorious or infamous for- really disliking big point in telling people to stay away from it and- you know I would say they look would anybody have any interest would you be asking the question Anthony. If it were going up. Right and that's the sign the people should be cautious just because something's. Going up doesn't mean it's good. And I think

look. I'm skeptical but let's say the bitcoin plays a role in the economy over the next five ten fifteen twenty twenty five years. Whatever time period you want let's assume that's true. First of all we should say crypto currencies not just bitcoin because what's so special about bit coin. Relative to others but- but let's say that's actually true and they are going to play a role in the economy. That

doesn't mean you're going to make money in it by investing today. And I don't think anybody really knows what the future holds for these things. And what you're really doing right now is speculating. And if that's what you want to do okay fine go do but don't don't make up a story that the price today justifies what's going on. In five years or ten years or fifteen years that's silly and the reason I bring that up and I think this is incredibly important. During the tech bubble in ninety nine in two thousand. There were tons of

promises made about how our lives were going to change. The Army is over the next ten years all those promises came true. But the tech sector was the worst performing sector in the United States when all those transformations came true. So people forget to tell the story that you're buying it's the investment and the valuation of the investment and if you can't value something like a big point why would you do that I mean just admit you're speculating this is not a fundamental story. And I've never Council individual investors or for that matter high net worth investors or institutional investors to speculate in the markets that that to me is not a way to build while. Rich I also want to jump to rates with you treasury rates were seeing ten year thirty year- making these I'm I wouldn't call them historic moves right there so we're still in this low environment. But there seems to

be a lot of activity in the last couple of days and we've also got inflation. You know with PPE I'd CPI coming in where do you stand on all of this how does it affect your outlook on the markets. Well I. I love the- everybody has sued the- you know the treasury rates are going up and you can't use treasuries as a- hedge anymore and all these kind of things. But yet people are investing in long duration equity strategies. Right I'm forgetting that of interest rates go up long duration equity strategies don't work along with them. And so you know number one you have to save yourself why would long term rates go up. And the

answer is. Because the strength of the nominal economy nominal being real plus inflation. The nominal economy is getting stronger. And that's what causes rates to go up. Well if the nominal economy is getting stronger why wouldn't you want to invest in the companies that are most sensitive. To that increasing dollar growth and nobody wants to do that. And to

me that's the big. Conundrum here is new. A lot of people say Gee rates are going up. We

got there been never buy these long duration strategies. And that makes no sense to me so I think. The right way to think about this is look if we're an- optimist on the economy. If

you're an optimist on the global economy should expect rates to go up. Right the nominal company's gonna get stronger. But make sure your equity investments. Have equal sensitivity. To the increase in interest rates. To the improvement in the nominal economy. What about on the

emerging markets side rich it's something that you're encouraging investors to do is look outside of China we were just. Speaking with the Laiho just a moment ago about yeah I'm of course since he's R. E. N. Z. I. O. here UBS but where

do you see opportunity right now in the emerging market space. Right so Anthony I think it's important. The the viewers understand the China during the first quarter of twenty twenty. Was a safe haven market.

There were only two safe haven markets in the world in the first quarter of twenty twenty one was Switzerland I like to be talking people from UBS when I say that. And the other was China. And that's reality and now we have big positions in China and I protected our portfolios in one Q. twenty

quite a bit. However just as the nominal economy has been improving and we reduced reducing safe haven exposure things like consumer staples and healthcare in favor of energy materials. We've been reducing China in favor of non China EM. And I think that's very important- the second thing I want to throw in here yesterday is that we've increased. Our weight to emerging markets high yield. And people like the clutch their chest single all minute show risky. But my guess is

most of your viewers don't know. The default rate on EM high yield is lower than the default rate on US how you. So is it really quite as risky as people think I'm not sure if you think the dollars going to be flat. To week that might be a source of income for investors. Thank rich yeah at

the end of last year because that certainly it's a it's an interesting stance to taken something to consider. Especially when thinking about investment portfolios I want to ask you about small cap there get a lot of attention these days. Especially on the value side you have any. Thoughts

there what do you think about small cap versus large cap right now. So I think I actually think this is a bit funny Anthony the- that everybody talks about innovation disruption all these companies being great long term investments. Notice actually looked at what actually has outperformed over the long term. And over the long term

small cap value not small cap growth small cap value. Is the best performing equity asset class in the United States it's actually quite humorous. And you know like for instance all the all the people at RBA that are in their twenties and they they're in you know one of four oh one K. or IRA or something. I always tell them put a 100% in the small cap value. You know that's what I did when I was in my twenties. And it's

worked out very well because over the longer term these are the most out of favor companies. They're the most of the companies are most sensitive to economic growth and over the long term through many many cycles they do very well. So I think that's number one the people to realize that's the place you should look for long term returns is small cap value. Number two small cap value is the most sensitive as I said before to the economy and therefore the most sensitive. To an economic recovery. So if you are an all. Here at all. On United States

if your optimist on the world to be think the global economy is going to continue to advance. You want to err on the side of small and you want to err on the side of values it's- it's the most economically sensitive sectors. Of the markets. Rich thank you and before I let you go just.

Digging a little bit deeper. Are there any particular sectors. That you're bullish on right now. Sure I mean if you

ask me my number one sector right now is the energy sector and I mean you know the old fashioned ugly stuff you know the dirty stuff not not the green stuff great stuff is fine and I think we should all embrace that. And you know anybody who doesn't want the energy sector to have new technologies I don't understand that right that's all about capitalism is innovation disruption things like that for some reason we get energy nobody wants to talk about it I don't get that but- so we should embrace that for the future but- that's a five or ten or twenty years story. Let's talk about the five ten or twenty months story. And if the global economy rebels. We

know the supply has been constrained demand is going to go up of the economy rebounds I think energy is one of the best plays out there for that economic rebuilt again the difference between the five and ten a twenty month. Versus five intended twenty year- investment. Rich always good to see you thank you so much for all your insights. And hopefully again we'll see each other in person in the studio verses this virtual world but at least we have this. And

always glad to have you join us Ritz burn scene C. E. O. in CIO. Of Richard Bernstein advisors thank you so much. Thanks Anthony. It is the rest.

Coming up next we've got Michelle liberty back for thematic Thursday. We'll talk about the implications of a boom. In the global population as well as what's going on in urbanization. Stay tuned for that. In the meantime if you

have a question or comment for us in the studio. You could send us an email to UBS studios. At UBS .com we'll be right back. Welcome back to UBS running everybody I'm Anthony Pastore on today's let's talk about money we bring back thematic Thursday and today we're going to share insights on how expectations for population growth around the world can be utilized for investors joining me now to discuss this topic is UBS chief investment officers thematic investing associate Michelle Laliberte. Michelle happy

Thursday it's always nice to have you here for these- Tech of these Thursday segments so you know there are some up projections out there Michelle that. The global population is expected to reach ten billion inhabitants by the year twenty fifty and I know that number seems so insanely high since we have just about eight billion now- but the U. N. is also doing their own forecasting what are they coming up with when they try to predicted population growth in the next you know. Couple of decades. Yeah sure good morning Indian thanks for having me- the forecast that you gave is pretty spot on- with those you and projection so their numbers right around. At nine point

seven billion for twenty fifty. I'm going to you know population growth you know one thing that's worth noting is that it's not. Uniform across regions right so even here in the US- we've seen. As the actual. Like life expectancy

come down a little bit. This isn't something that we think is necessarily going to process- but it does help you add some context and where we actually expect to see. Population growth we do expect to come. More from a merging of Connie's- particularly in Africa or some Asian countries as well. So and really not uniform- but it does come at a time when we also have what we're calling environmental credit crunch- so we have this population is growing. We need

to feed more people with less arable land to do so. I mean I would I would say to is not the only demographic trend that we're seeing right we're also witnessing. An aging population. And we're also seeing continued urbanization.

Something that we should all be paying attention to but as investors how can. We use this information to even navigate the markets today. Sure it when we think about these types of Transbaikalia Asian growth- hearing CIO we do is we identify these megatrends as we call them that we expect to play out really regardless of where we are in the business cycle so deeply rooted trends- and we look at how these trends are going to shape the world in the years ahead. What challenges are they going to create a and importantly what are the investment opportunities involved in the products and services that can help solve some of these challenges we've identified three mega trends- here that really shape the foundation for a lot of our themes and they are the those three I just mentioned- aging population growth as well as urbanization.

And the reason of this is relevant for investors is because these trends are going to significantly influence the demand curve for certain products and services when we think about something like aging for example in a little more than a decade in developed economies there's going to be a higher number of people over the age of sixty. Verses the number under the age of twenty five so this is going to create higher demand for certain services right like medical devices I healthcare services in general as well as- things even like retirement planning- retirement homes and assisted living. And so there's a lot of things to think about her and how these are going to shape investment opportunities in the years ahead. And also just

quickly coming to urbanization because we have been getting that question a lot- you know considering the US for seeing people move out of cities like New York or San Francisco especially in during the pandemic they're looking for a little more space they don't need to be as close to their office- but that's and we live. Here in the US and at higher income developed economy at the has a higher percentage of the workforce as able to do this and we look to emerging markets we. Still believe that this urban the trend still and well- as people. You know to move to city for different opportunities whether it's education- in closer proximity to certain health care services are even just for a different type of job. So we still think that this is a trend we expect to see play out- in this population shift is going to again change demand for certain things so water usage- transport and food processing.

So there are significant implications here- for healthcare education as well public infrastructure. Right certainly we know the pandemic at this point has aspect up a lot of. Things like technology for example the medical technology specifically that you're talking about urbanization is a big part of that as well it's almost like he knew it was coming at some point but it just. Happened a

lot faster due to what happened with that with quarantine last year so Michelle we know given everything you're talking about in those megatrends what sectors investment sectors are you know you saying for especially long term investment positioning. That investors should be keeping in mind. Sure so is really is a- cross sector opportunities here so what we do is we identify. The certain pockets of the market that look well positioned with these trends I already named a few of these right things like medical devices- healthtech. I

mentioned urbanization and how this can ship demand for certain things like infrastructure. So to that point again we do have emerging market healthcare as well as emerging market infrastructure themes- as well as a number of other opportunities at play to urbanization- but originally you you asked about. Population growth rates I think. Before I close I have to mention are are some of our food themes so.

Given the population growth that that we've been talking about today and about every six weeks it's estimated that the world has to be about an additional. Eight point five million people so that's a quick went to a population of London so that's no small feat- and we put together in a couple research reports around this phenomenon- but what we expect to see is precision agriculture opportunities- we actually think these coppers on the highest growth. Areas for investors in the years ahead- as we look to improve agricultural yields improve efficiency in order to combat that growing population. And to feed the growing population. Absolute that is it yeah huge concern is where you know there's more people and- only so much earth to go around and- growing food and- different types of technologies that are out there to help that is. Are

really starting to come to the forefront and certainly with something we've been talking about quite a bit over the- the last year or so Michelle so what what are are some other themes. That investors should be aware of emerging as we're talking about urbanization particularly as we're talking about. Population growth. Shares in terms of what's emerging right now I think that's- probably a good opportunity to tie some of these. Longer term

opportunities to what we're actually seeing in the market right now. And overall you know high level and we are positioning for a cyclical recovery. So within the U. S. rocking at cyclical sectors small and mid caps are a little bit more tied to economic growth. I am or also diversifying globally and particularly into emerging markets. Where valuations look

a little less demanding at relative to developed equity- developed equities. And EM also tends to do well in. More of a risk on market especially when you have a higher commodity prices and a weaker dollar. So when the masses to our longer term investment themes may already have mentioned how a lot of these themes are tied. At two emerging markets- but there's also specific pockets of our themes that are a little bit more tied to. The re

opening of the economy in the cyclical recovery. As we think about something in the- like the healthtech. Our healthcare sector if for example- you know within. Within our healthcare themes of medical device companies have were. Hit pretty hard at it during the pandemic as- hospitals became more overwhelms. Electrics are sorry elective surgeries were either delayed. Or delayed or canceled

all together- so as we have this vaccine rollouts- the economy begins reopen in and hospitals. And hopefully become less overwhelmed I will start to see these elective elective surgeries come back and we'll- that should benefit these medical device companies as well so. There are certain pockets within longer term themes that are more tied to the cyclical recovery- and again we do have that. As a positive you emerging markets. Excellent Michelle- always good to have you here on this and we see and week Michelle Laliberte. UBS investment offices thematic investing associate thanks Michelle. Thanks Anthony. And if you

have a question that you'd like answered on a future let's talk about money segment you could send an email to us at UBS studios at UBS dot com and we may answer it right here on a future episode and as always. If you have any questions about your investment portfolio or need financial guidance we encourage you to speak with your financial adviser. All tomorrow's show we're going to be talking with our CIO Selena Marcelli who's gonna provide her thoughts on the markets and the opportunities that she sees right now will also take a look at the boost in retail spending in the month of January. And how those stats could impact your daily life will also focus again on opportunities within sustainable investing until then I'm Anthony pastore have a great day everyone remember to keep an eye on. What's trending

C. tomorrow.

2021-02-23 17:53

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