The five CIOs taking part in Julius Baer's Intermediaries CIO Roundtable debate how effectively central banks can support asset prices and which markets look set to prosper in a post-Covid world. What are the threats from inflation? And, why does China look so attractive?

With a year unlike any other having passed, the members of Julius Baer's Intermediaries CIO Roundtable met at the beginning of a new era of state-sponsored capitalism. They believe it's a positive environment for equity markets, especially China and other Asian markets.

Taking part in a panel discussion for wealth management experts to exchange views on major trends, Yves Bonzon, Pau Morilla-Giner, Harry Pang, Lawrence Lee and Mike Ellis debated the outlook for markets. The group met virtually in the first week of March, shortly after inflation fears had temporarily spooked global bond markets.

They debated how the new era of greater government intervention in the economy would influence financial markets, against a backdrop of possibly higher inflation and expensive asset valuations. With varying degrees of conviction, they judged that central banks would continue to support asset prices and that equities would prosper in the medium term.
The big picture
For three decades neo-liberalism has dominated economics, but as the wealth gap reached record levels in advanced economies state-sponsored capitalism became inevitable, according to Julius Baer's Group Chief Investment Officer, Yves Bonzon. Covid-19 has accelerated the shift to this new era, ushering in its trademark fusion of fiscal and monetary policy. “As we navigate 2021, we also know that inflation will pick up,” remarks Bonzon. “Will it be confined to 2020 and 2021 or longer lasting? It's hard to read because there are so many variables, but I think it will take longer for sustained inflation to feed through.”

An implication of the new era will be the quasi-nationalism of government bond markets, notes Pau Morilla-Giner, London & Capital Asset Management's CIO. “Any normalisation of interest rates would be catastrophic for the US Federal budget and almost every major economy. So we could soon see a struggle to control the yield curve. If the Fed caps yields then the dollar will fall hard because bond buying will have to accelerate, leading to money supply growth.” Anticipating a weaker dollar, reduced geopolitical risk from a Biden presidency and a more reflationary environment, he believes the outlook is positive for emerging markets and commodities.

Not everyone is equally sanguine about inflation. Harry Pang, founder and partner of Hong Kong-based Fountainhead Partners thinks there is a risk that higher inflation might spark greater market volatility. “Once Covid-19 is under control everybody will be in the street spending money, booking restaurants weeks in advance,” he foresees. “Already, online price hiking on Amazon is much higher than what's showing in consumer price index data. So, inflation will increase and impact the 10-year Treasury and then we will take some chips off the table. This will affect all sectors, as nothing is especially cheap right now.”

“I agree with Harry that governments won't want to take away the punchbowl by raising interest rates,” adds Lawrence Lee, CIO at Sino Suisse in Singapore. “Since the financial crisis you have had significant bond buying from central banks. I don't think that will change any time soon. We see a range-bound market this year because valuations are so expensive.”

The China Trade
When it comes to China, Julius Baer has been consistently bullish since 2017 and sees no reason to change now. China's capital markets are far smaller than the size or growth of the economy merits and are expected to develop significantly. Chinese companies also give exposure to technological innovation. “There are roughly 100 companies growing their top line revenues at over 15-20% a year: 75 are in the US, 15 in China and the others elsewhere,” says Bonzon. “Finally, China is now the only place in the world with a conventional monetary policy.”

In Tel Aviv, Mike Ellis, CEO and CIO of Pioneer Financial Planning, says that as long as inflation does not get out of control he believes that a full allocation to equities is justified. “We prefer more expensive stocks with better growth prospects that will benefit from economic reflation, rather than cheaper stocks with lower growth prospects,” he explains. “That has led to us being overweight the United States and China.” 

Similarly, Harry Pang is buying stocks that look expensive but may not be in three years in areas like TMT, internet, consumer upgrade and healthcare. From his base in Hong Kong, he's excited about his home market: “Over the past five years Chinese businesses have grown and matured. Management's ability to execute is very dynamic. China may not always be ahead in technology development but the market's technology adoption is huge, especially in online consuming. Look also at consumer wealth. China's GDP per capita recently exceeded USD10,000 and is quickly catching up with developed economies.”

Final Word
To varying degrees, the CIOs are optimistic about equities but see risks from inflation. “Everything is expensive and central banks know that they must sustain asset prices rather than fight bubbles,” concludes Bonzon. “I think we're nowhere near the end of the secular bull market. Equities may be approximately flat in 2021 and then rally again in 2022 as markets normalise in a post-Covid world. What's clear is that the biggest risks are in bonds not equities.”  

Key Takeaways
  • A new era of 'state-sponsored' capitalism is beginning after 40 years of neo-liberalism.
  • China is the only major economy that still has a conventional monetary policy, while benefiting from fast growth, under-sized capital markets and dynamic innovation.
  • Central banks are focused on sustaining asset prices, so underpinning the equity market.