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LGT Private Banking Europe House View – April 2021

March 31, 2021

The plan for a gigantic US infrastructure package and rapid vaccination successes should give a strong boost to the economic recovery in the United States. In the current market environment, we continue to favor cyclical stocks in equities, in addition we upgrade the insurance sector to “attractive”. In the bond segment, concerns about rising inflation have led to heavy losses on US government bonds.  However, we believe these fears are premature.

LGT Private Banking Êurope House View

After a year in the grip of the Covid-19 crisis, the first vaccine successes are beginning to emerge in the Western world. Progress is particularly evident in the world's largest economy. However, the United States of America leads the global statistics with 30 million coronavirus infections and more than 500 000 deaths. The US has pursued a consistent vaccination strategy in the first quarter, clearly outpacing continental Europe. The only exception in Europe is the UK, which also reports fast progress in Covid-19 vaccinations. Many governments in the European Union have done a poor job and it would be no surprise if this has political consequences in some countries. However, this is unlikely to impress capital markets, as countries such as Germany and France are expected to improve their vaccination strategies in the second and third quarter of this year. We expect vaccination failures to trend downward, with further successes to be seen globally in the next six months.

Biden's infrastructure program

In the United States, Joe Biden has not even been in office for 100 days, and already the 46th President is expected to deliver on another campaign promise. Following the passage of two Covid-19 aid packages worth USD 900bn and USD 1.9 trillion, as well as vaccination successes, a gigantic infrastructure program worth around USD 3 trillion is in discussion. The money is not only to be spent on infrastructure, but also to combat climate change and reduce economic inequalities. Whether and when this package will be passed remains unclear and probably summer will come around until the upper and the lower chamber on Capitol Hill will have to decide on it. For investors, however, it is becoming apparent that the rapid and strong recovery of the US economy will be supported by additional stimulus measures in the foreseeable future.

US inflation expectations continue to rise

In an economy that is expected to be running at full speed once it reopens in summer, the topic of inflation is bound to come up. This is already being indicated by the markets, with medium-term inflation expectations having only risen moderately to 2.2% and not (yet) being a cause for concern. The Federal Reserve is so far taking a relaxed view regarding the rise in inflation, as it considers this development to be temporary and thus does not see itself under pressure to raise interest rates in the next two years. Fed Chairman Jerome Powell recently stated that the rise in long-term rates – ten and 30 years – is based on the solid recovery of the US economy. In addition, the Fed already announced last year that it would tolerate inflation rates above 2% in the short-term, and that it considers the inflation target of 2% to be an average over an entire economic cycle. In our view, there is considerable room for interpretation here and thus many opportunities to react.

In the eurozone, however, the situation looks less promising, as there have not yet been any notable successes in terms of impulses and the economy is recovering more slowly than in the US and China. Likewise, no additional infrastructure projects similar to those in the US are planned. At 1.15%, inflation expectations in Germany are lower than in the US dollar area and far below the 2% target of the European Central Bank (ECB).

Investment strategy – focus on the three “R”

In the current market environment and with central banks continuing to act expansively, three “R” are the focus of the investment strategy for the near future: 1) reflation, 2) rotation and 3) relative attractiveness. Not only the Fed, but also the ECB and the Bank of England (BoE) have vehemently reiterated their commitment to maintain an ultra-expansionary monetary policy in the coming months, thereby continuing to actively support reflation. At present, central banks do not seem to have any serious concerns about a too strong and rapid rise in core inflation in the distant future. The first “R”, reflation, has a direct impact on rotation, our second “R”. Since the end of 2020, we have observed a strong rotation in equity markets. We expect that within the equity asset class, rotation into cyclical investments are likely to continue soon. Thus, we continue to prefer financials and companies that benefit from rising commodity prices. The third “R” – relative attractiveness – is of key importance after twelve months of dual stimulus, not only across assets but also within individual asset and sub-asset classes. At the top level, this means that we prefer equities over bonds, and we also see more potential in commodities than in liquidity. In bonds, we prefer the hybrid space to investment grade bonds. In equities, we are now adding the insurance sector in the cyclical area. We continue to avoid companies with extremely high valuations based on the principle of hope or fantasy. In commodities, base metals continue to stand out for us, as they are likely to benefit from very strong global economic growth this and next year.


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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Author: Thomas Wille, Head Research & Strategy, Email:
Editor: Alessandro Fezzi, E-Mail:
Source: LGT Bank (Switzerland) Ltd.

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