Macro Monthly 3 macro curves confirm economic strength
Evan Brown, Head of Multi-Asset strategy discusses the three market curves that could indicate an economic recovery.
As multi-asset investors, we scrutinize the investable universe for signals that confirm or challenge our base case.
In examining three important market-based curves and another relating to public health outcomes, we believe that we have found ample evidence to support our risk-on, procyclical bias and optimism on the global economic recovery.
We will monitor the evolution of these curves to determine if and when the macroeconomic sands are shifting, and are prepared to adjust our positioning accordingly.
3 market-based curves that stand out
1. Steepening yield curve
The steepening of yield curves speaks to the combined monetary-fiscal support that is underwriting the nascent expansion until it reaches a much more mature phase
That global yield curves are steepening points to an expectation that central banks will remain accommodative for an extended period of time to allow the pandemic-induced economic damage to be repaired.
Long term bonds sell off on enhanced conviction in an eventual return to normal
Source: UBS-AM, Bloomberg. Data as of 24 February 2021
3. Overly cautious VIX futures
The term structure of VIX futures suggest additional risk premium lingers in equity markets which could dissipate over time and buoy equities in the process.
VIX futures curve suggests elevated concern on the outlook for equities
Source: UBS-AM, Bloomberg. Data as of 23 February 2021.
Conclusion – the key macro curves are all pointing in the right direction
Vaccinations are the necessary prerequisite for a sustainable economic recovery. The commodities rally, and shape of those futures curves, point to the substantial rebound in demand and expectations for more to come. The steepening of yield curves speaks to the combined monetary-fiscal support that is underwriting the nascent expansion until it reaches a much more mature phase. And the term structure of VIX futures suggest additional risk premium lingers in equity markets which could dissipate over time and buoy equities in the process.
These key macro curves are all pointing in the right direction. While these fortify our stance that there is more upside in global equities, we are even more enthusiastic about the relative value positions beneath the surface in stocks. For procyclical trades that are performing well lately – value stocks vs. growth, US equal weight relative to market cap indexes, and international equities vs. the US – there is considerably more room to run.
But we are cognizant that this bright, early-cycle backdrop will not persist in perpetuity. We will closely monitor shifts in these curves, along with other economic and market indicators, to judge whether the macroeconomic environment is changing or the procyclical rebound is fully priced into different asset classes.
At present, the widespread cross-asset corroboration for our constructive stance on global equities and negative view on sovereign bonds bolsters our confidence in sticking with what is working.
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Asset class attractiveness
The chart below shows the views of our Asset Allocation team on overall asset class attractiveness, as well as the relative attractiveness within equities, fixed income and currencies, as of 25 February 2021.
Source: UBS Asset Management Investment Solutions Macro Asset Allocation Strategy team as at 25 February 2021. Views, provided on the basis of a 3-12 month investment horizon, are not necessarily reflective of actual portfolio positioning and are subject to change.
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