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May 2021 Monthly Market Commentary: Biden’s massive new spending plan to fuel the reflationary trend

Market Context: Biden’s massive new spending plan to fuel the reflationary trend

Global Macro:

In May, the market’s risk-on sentiment was supported by the gradual global economic recovery – country by country – as well as better-than-expected corporate earnings. Meanwhile, central banks confirmed their near-zero short-term interest rate policy, a key factor to maintaining the high price level of stock markets in the West. In the US, The New York Times announced that President Biden will propose a USD 6 trillion budget, which would represent the country’s largest federal spending since World War II. Although the final budget remains subject to approval by the US Congress, we believe Biden’s economic policy will worsen the US’ commercial deficit, thus weakening the US dollar and resulting in imported inflation from exporting nations, particularly in Asia. In China, the Caixin General Manufacturing PMI (Purchasing Managers’ Index) reached a five-month high in May, underpinned by the country’s steady post-pandemic economic recovery. We note growing investor concerns about rising inflation around the world and the fact that central banks may start scaling down their monetary stimulus sooner rather than later. However, given world leaders’ shared objective to curb energy consumption and increase cost efficiency, as witnessed by the uberization of the economy, we believe the rise in inflation will be transitory and fade by 2022 as GDP growth numbers return to levels reflecting countries’ post-pandemic economic development, i.e. around 3% in the US, 1.5% in Europe, and 6% in China.

Financial Markets:

Rising inflation expectations facilitated sector rotations in May, favoring cyclical sectors, such as financials, manufacturing, and energy, over growth sectors like technology. Higher inflation expectations also supported gold, which rallied 7.8% in May, with Gold ETFs attracting about USD 2bn of inflows. On the currency front, the US’ massive dollar printing is creating a downside risk for the greenback. Meanwhile, Russia announced it will remove the US dollar from its oil fund to reduce vulnerability to US sanctions, shifting the US dollar holdings to euros, yuan, and gold. This move is in line with the ongoing global de-dollarization trend. As a result, we anticipate further support for the EUR and RMB in the coming months. Historically, the USDRMB exchange rate (now at 6.40) was as low as 1.50 in the early 1980s while the EURUSD (now at 1.21) touched 1.60 in 2008, giving us an idea of how far currencies can move when the world’s geopolitical equilibrium changes.

Equity: Month to date the S&P 500 gained 0.5%; Euro Stoxx 50 +2.2%, Hang Seng Index +1.5%. Fixed Income: The 10-year US yield contracted 5bps in May to 1.58%, which contributed to the rise in Emerging Market government bonds (+0.9% in USD and +2.2% in local currencies). High-yield corporate bonds edged up 0.4% in EUR but decreased 2.0% in USD. Currencies: The US dollar further weakened amid Biden’s massive spending plans: EUR +1.4%, CNY +1.6%, AUD +0.2%; safe-haven JPY -0.3%, CHF +1.4%. Commodities: Both oil and gold prices continued to rally in May amid the global reflationary environment: WTI Oil +5.8%, Gold +7.8%.


  • Covid-19: The emergence of vaccine-resistant Covid-19 variants could result in new restrictions and lockdown measures around the world, with a strong negative impact on the economic growth outlook.
  • Long-term interest rate hikes: We expect central banks to start reducing cash injections and tapering their bond purchasing programs within the next 12 to 18 months, which will result in higher interest rates and downward pressure on equity valuations. Meanwhile, investors are requiring higher yields to compensate for the risk of governments’ ballooning debt.
  • US Tech bubble & high US equity valuations: Tech stocks remain under pressure, given the highest valuations since the dot-com era and high market concentration, while the Biden administration is expected to take a much stronger stance on the tax and anti-trust treatment of Tech companies.
  • US-China tensions: US-China trade frictions remain strong, with increasing tension around Taiwan and the South China Sea. In addition, the US is maintaining pressure on Chinese companies listed on US stock exchanges by implementing stricter rules targeting Chinese firms.


  • China H-shares: We believe H-shares’ upside potential remains intact given China’s growth dynamic and relatively cheap equity valuations, with H-shares trading about 20% below their 2018 highs and 40% below their pre-2008 crises level. Moreover, the composition of the Hang Seng Index is changing in 2021 with an increase in the number of components while the proportion of sectors participating in the digital transformation rises and cyclical stocks, such as financials and property stocks, remain a substantial part of the index. We expect the Hang Seng Index to benefit from the long-term trend of digital transformation, the cyclical sector rotation, and the reflationary recovery of 2021 and 2022.
  • Financials: We expect the financial sector to benefit from the reflationary environment of higher yields and a steeper yield curve, but also from stronger growth via a reduction in nonperforming loans and the positive impact from lower loan provisions on earnings revisions. This would be positive for both the banking and the insurance sectors, where valuations continue to look attractive. We think stocks of well-capitalized quality banks in the US, Europe, Hong Kong, and Japan will pay above-market dividend yields following their central bank’s green light.
  • Oil & Gas: The sector partly recovered in 2020 and early 2021, yet still trades below the book value of the market and is lagging the oil recovery. We are seeing increasing interest from investors towards major energy players that are implementing green energy programs to transition from fossil fuels to clean, sustainable energy production.
  • Chinese Yuan: The RMB reflects the forward growth of the Chinese economy and the increase in global trade and investments in RMB. The yuan is also becoming an important reserve currency for central banks and financial institutions, underpinned by China’s strong economic fundamentals: a large positive commercial balance, growing domestic consumption, and interest rates at 3% vs close to 0% in Western economies. Moreover, China became the number one country in the world for Foreign Direct Investments in 2020 according to the UN, with growing inflows from investors buying Chinese stocks, bonds, and hard assets contributing to the strengthening of the renminbi and consolidating its role as a major trade currency.