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LGT Private Banking Europe House View – February 2021

January 27, 2021

US President Biden has started his term in office with a lot of drive. The expectations he faces are enormous, as are the challenges that lie ahead. Thus, the corona pandemic will be the first crucial test for the new administration. We maintain our positive economic outlook for 2021 and expect a strong recovery in corporate earnings. However, the extreme positioning makes equity markets vulnerable to setbacks. The road to further gains is therefore likely to be rockier.

LGT Private Banking Êurope House View

The inauguration of US President Joe Biden took place just a week ago. The expectations and hopes are enormous, not only for Biden, but for the entire new government crew in Washington. The pace set by the 46th president in his first seven days is reminiscent of a hundred-meter run with Usain Bolt: thus, Biden immediately announced that the US would rejoin the Paris climate agreement and the World Health Organization (WHO), reversing decisions made by the Trump administration right at the start of his term. In his first hours as president, Biden has issued more than 15 executive orders, clearly outpacing his predecessors. However, the major test for the new administration is its management of the Covid-19 pandemic, including issues such as mask-wearing or the nationwide vaccination strategy. The pile of tasks is huge, as are the expectations.

Promising economic outlook, little inflationary pressure

Although everyday life is once again at a standstill in many Western countries after measures to combat the corona pandemic were tightened again, we are sticking to our positive economic forecast for 2021 for the time being. Of course, there may be short-term dips in growth here and there in the first quarter, but we remain optimistic for the year as a whole. The support programs of central banks and G10 governments continue to provide enormous tailwinds, and hopes for fiscal policy measures have even received a boost with the inauguration of Joe Biden. At the same time, inflationary pressures at the global level have so far remained moderate. Although inflation expectations in the five- to ten-year range have risen in the US, the increase is not a cause for concern. Higher long-term expectations also appear reasonable, as the risk has clearly increased that inflation will pick up in the distant future. For the time being, however, the most important market driver remains the unprecedented dual stimulus. 

Different risk premiums for liquid asset classes

The current market environment is forcing investors to take risks on capital markets in order to generate a positive return. We want to be compensated with an appropriate premium for the risks taken. In this context, it is not only important to analyze the risk premiums across all assets, but also to take a close look at the historical development within an asset class. As equities are more volatile than bonds, they also generally yield higher risk premiums. A closer look at the values shows that the premiums of all fixed-income asset classes – US government bonds (UST), US corporate bonds (US IG), US high-yield bonds (US HY) and emerging market bonds denominated in US dollars (EM $) – are currently below the long-term average. A similar picture can be seen in European bonds. In addition, equities clearly outperform other asset classes, with European equities and EM equities leading the way.

Seasonality and positioning

In the months from November to January, investors can generally achieve above-average returns on equity markets, as history shows. This has also been the case for the past three months. The coming weeks are likely to be somewhat tougher and we expect higher volatility in capital markets. However, this does not affect our constructive stance for the year as a whole; rather, we expect a period of digestion of price gains after the recent surge. In addition, the extreme positioning on the markets could also provide headwinds. The last two months have seen record inflows into equities. While this is not unusual for the period from December to January, but nevertheless incremental buyers are likely to fall away in the near term. Both factors – seasonality and positioning – are unlikely to herald the end of the bull market in equities, but the road will be rockier and more arduous.

Taking profits in emerging market bonds

As described, we maintain our constructive stance, but the time has come for a breather, like a strenuous hike in the Alps. In our view, it remains central for investors to receive an adequate premium for the risk taken in each asset class. The cross-asset preference for equities over bonds remains, with selection continuing to be the key success factor for equities. Following the strong performance of emerging market bonds in hard currencies, we reduce our rating from “attractive“ to “neutral“. In the event of higher volatility in the capital markets, gold serves as an ideal hedge.


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

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