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30% 90%
30% 88%
80% 80%
Sector weighting %
Commodities firm. Europe’s energy crisis Our key views: and now to 2022
• Commodity prices were resilient to cross- • 2021 was a very positive year across crypto,
currents of a firm US dollar (that makes USD commodities, real estate, and equities. We see
denominated commodities more expensive for a positive 2022, though likely with lower
many to buy), and some relief that the Fed’s returns. 1) global vaccine rollout and economic
hawkish pivot was not more aggressive (that re-opening to continue, 2) still large support
would threaten commodity demand). We from low interest rates and fiscal spending.
remain positive the outlook, with a ‘sweet spot’
of better commodity demand and tight supply. • Virus fears are dampening the growth outlook,
but economies are increasingly resilient to this.
• UK and European natural gas prices spiked 30% Similarly, the US Fed turned more hawkish, to
last week and set new all-time-highs. European combat inflation. This will be a lower and slower
natural gas storage levels are well below rate upcycle than historic, and markets resilient.
average. This makes gas markets very sensitive
to colder weather and geopolitical tensions. • We focus on cyclical assets that benefit most
Russia is Europe’s largest gas supplier and from decent growth: commodities, crypto, small
tensions over Ukraine and delays to new Nord cap, and value. We are more cautious on fixed
Stream 2 pipeline approval have been rising. income, defensive equities and China.
US Equity Sectors, Themes, Crypto assets Fixed Income, Commodities, Currencies
Small Caps -1.71% -8.02% 10.08% DXY USD 0.60% 0.67% 7.50%
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Focus of Week: Taking the investment pulse
Taking the global GDP growth pulse ahead of 2022. India, US, and Europe lead
Latest purchasing manager index (PMI) data provides a timely heath check for the global economy (see
chart). Growth is naturally easing back from the huge recession-rebound this year and with omicron fears
now rising. But no major economy is below the PMI level of 50 that indicates a recession risk. India is
seeing the strongest growth, followed by much of Europe as well as the US. By contrast Germany is
suffering form surging covid cases and its huge auto sector hobbled by semiconductor shortages. UK
numbers are falling fast as it remains the centre of the omicron outbreak. China is hurt by the impact of a
zero-tolerance covid on the consumer, and a very large and indebted property sector. Global growth is
forecast at around 4.5% next year, and we see upside to consensus earnings growth rates only around 7%.
Tantalising signs that inflation fears may be peaking, and Central Banks to go slow, helping equities
Latest PMIs also provide a tantalising glimpse of peaking inflation. Price pressures are seen easing slightly
from November peaks, as supply chains adjust. This is consistent with our proprietary index which shows
lower freight rates and semiconductor prices, though from very high levels. But even with global inflation
to ease from this year’s level near 5%, central banks are beginning to respond. The UK surprised by starting
to hike interest rates last week, the first of the biggest central banks. The Fed is now targeting three hikes
next year. These tightening cycles are lower and slower than historically, and still able to support equity
valuations well-above long-term levels. Whilst some, in Europe and Japan, will not hike next year at all.
The indices are available for over 40 countries and industries globally, produced monthly, and derived
from business condition surveys of senior company executives. The questions provide insight into the
outlook for GDP, inflation, exports, inventories, and employment, among other indicators. They are seen as
an important and timely leading indicator. The index represents the degree of change from the prior
month. A level over 50 indicates expansion, whilst a level below 50 contraction.
Still-strong GDP growth will drive upward revisions to overly conservative consensus earnings growth. A
gradual central bank tightening will allow valuations to stay high. We see around a 10% global equity return
next year, significantly lower than this year, but a near unprecedented fourth straight year of strong
returns. Risks can be managed by focusing on stronger growing sectors, like consumer discretionary and
industrials, or cheaper segments like financials, energy, and Europe. Multi-year themes such as
renewables, electric vehicle, and crypto, remain attractive. We also see room for a modest China equity
turn around, as growth and regulatory pressures ease, and are at least well priced-in now.
Health check: composite purchasing manager indices (Latest)
62
59
60 'Break-even’ growth 50 level
57 58
58
56
56 55 55
54 53
52 52
52 51
50
50
48
46
44
GE CN JP BZ UK WRLD AU FR US IT IN
Source: HIS Markit, ISM. GE=Germany. CN=China. JP=Japan. BZ=Brazil. UK=United kingdom. AU=Australia. 4
FR=France. US=United States. IT=Italy. IN=India
Key Views
The eToro Market Strategy View
Positive scenario of 1) accelerating global vaccine rollout and economic re-opening, and 2) large economic policy
support of low interest rates and fiscal expansion. Main risks of 1) gradual but well-telegraphed Fed monetary
Global Overview
policy tightening, and 2) new virus waves, but each to have lower impacts. Focus on reflation and cyclical assets:
equities, commodities, crypto, small cap, value. Relative caution fixed income, USD, defensive equities and China.
World's largest equity market (55% of total) seeing GDP growth 2x average , and driving earnings upside 'surprise',
and a rare fourth consecutive year of 10%+ equity market returns. Valuations at 22x P/E are 30% above historic
United States
levels but supported by still low bond yields and strong earnings growth outlook. See further cyclicals and value
catch-up, after a decade of underperformance, whilst tech supported by its structural growth outlook.
Equity markets helped by 1) a greater weight of cyclical sectors, and lack of tech, 2) 25% cheaper valuations vs US,
3) decade of under performance made under-owned by global investors. Helped by a dovish ECB to hold rates ‘low-
Europe & UK
for-longer’, and multi-year €750bn 'Next Generation' fiscal support. A weaker EUR helps many companies, with
50%+ company revenues from overseas. ‘4 th wave’ virus resurgence may provide additional buying opportunities.
China, Korea, Taiwan dominate EM, with 60% weight, and is more tech-centric than US. China equities hurt by tech
Emerging Markets (EM) regulation crackdown, property sector debt, and slower GDP growth. But this is increasingly well-priced. LatAm
and Eastern Europe have more upside to global growth recovery, a weaker USD, and higher commodities.
Canada and Australia benefit from strong equity market weight in commodities and financials, as global growth
Other International (JP,
rebounds and bond yields set to rise. Japanese equities among cheapest of any major market and vaccination rates
AUS, CN)
accelerating, but structural headwinds of low GDP growth, an ageing population, and world's highest debt.
The broad 'tech' sector of IT, communications, and parts of consumer discretionary (Amazon, Tesla), dominates US
Tech and Chinese markets. Expect a more subdued performance after dramatic recovery rally. But are structural stories
with good growth, high profitability, fortress balance sheets that justify high valuations, and should continue to rise.
Healthcare, consumer staples, utilities, and real estate sectors traditionally offer more defensive cash flows, less
Defensives exposed to changes in economic growth. This has also made them more sensitive to rising bond yields. We expect
them to relatively underperform in a more cyclicals focused environment with earnings strong and yields rising.
We expect cyclicals - consumer discretionary (autos, apparel, restaurants), industrials, energy, materials, to lead
Cyclicals performance. They are most sensitive to the sharp economic recovery, reopening and higher bond yields, with
more sensitive businesses, depressed earnings, cheaper valuations, and have been out-of-favour for many years.
Financials will benefit from the GDP growth recovery, with higher loan demand and lower defaults. Similarly, they
Financials benefit from higher bond yields outlook, charging more for loans than they pay for deposits. Sector has cheapest
P/E valuation of any, and regulators recently giving flexibility to pay large 8-10% dividend and buyback yields.
We favour small cap vs large, on more GDP growth exposure, earnings upside, and domestic focus. Similarly, value
Themes over growth on GDP recovery, lower valuations, under-ownership after decade under-performance. Dividends and
buybacks recovering with cash flows. Power of dividends under-estimated, at up to 1/2 of total long term return.
USD well-supported for now by rising Fed interest rate outlook and 'safer-haven' bid on virus fourth wave virus.
Currencies This is likely more modest than prior USD rallies as rest of world growth recovers and virus fears ease. A strong
USD traditionally hurts EM, commodities, US foreign earners, such as tech, but helps EU and Japan exporters.
US 10-year bond yields to rise modestly as inflation above 2% average Fed target, 'real' inflation-adjusted yields
Fixed Income negative, Fed to gradually tighten policy. Will be modest as inflation expectations already high, wide spread to other
market bond yields, and structural headwinds of all-time high debt, poor demographics, and low producitivity.
Cross-currents of rising global growth conern on virus fourth wave, and stronger USD. But remain in 'sweet spot' of
Commodities above-average GDP growth, 'green' industry demand, years of supply under-investment. Industrial metals and
battery materials well positioned. Oil helped by slow return of OPEC+ supply. Gold hurt by likely rising bond yields.
Institutionalization of bitcoin market barely begun, as asset class benefits from very strong risk-adjusted returns
Crypto and low correlations with other assets. Altcoins have outperformed as see broader interest and use cases. Clear
supply rules a benefit as inflation rises. Volatility remains very high, with the 15th -50% pullback of the last decade.
Source: eToro
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Analyst Team
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