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Investment Outlook Second Quarter 2021 Update

Mar 31, 2021

Investment Summary

  • In our 4Q20 and 1Q21 strategy notes, we wrote that vaccines would be successfully implemented, and together with supportive fiscal and monetary policy, this would lead to high growth and rising bond yields that would be positive for equities especially in value sectors.

  • That thesis has now become market consensus and the main debate for the remainder of 2021 is not whether there will be enough growth, but rather will there be too much growth and especially inflation.

  • The market is pricing-in long-term inflationary factors, but we see these factors as short-term and transitory. We expect inflation in US to rise in 2Q21 and CPI to peak at 3.5-4% due to energy and food prices increases. Inflation should then fall to ca. 2-2.5% by YE 2021 amid slow labor market and wage recovery as well as anchored inflation expectations and exhaustion of pent up demand.

  • As a result, we expect 10Y UST to peak at 1.7-1.9% in 2Q21 followed by risk aversion and high volatility in the bond universe. However, 10Y UST should stabilize at 1.5-1.6% by YE 2021 given expected inflation slowdown. Moreover, we cannot exclude Federal Reserve action to dampen rising long-term treasury yields.

  • OPEC+ remains the main factor influencing oil prices. The block is expressing a desire to inflate prices, delaying production recovery for longer than originally planned, despite a gradual recovery in demand. We raise our average 2021 Brent oil price forecast to USD 60, the long-term forecast is set at USD 55. Our forecast for 2022 is USD 58.

  • The USD may not weaken in 2Q21, but we expect it to in 2H21. EURUSD should reach 1.23 by YE 2021.


Investment Preferences

  • We remain Overweight (+) on European equities, which are better positioned for a gradual economic rebound due to more cyclical index structure.
  • We keep a Neutral (=) stance on US equities, where accommodative monetary policy and appealing fundamental growth potential balances against relatively high valuation.

  • We remain Overweight (+) on Russian equities (~25%**). Overall, we favor oil&gas and banking sectors. However, upside is considerably lower than 3 and 6 months ago.

  • We keep a Neutral (=) stance on Russian debt – both RUB bonds (>6-8%**) and Russian Eurobonds (2-3%**).

  • We prefer to be Neutral (=) on GEM USD-denominated debt (3-4%**) – short-term and HY bonds are less sensitive to inflation risk.


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VTB Capital Investment Management