Fynsa
We reiterate our call that markets are likely to experience continued and significant internal rotation toward year-end, driven by a rebound in bond yields and the end of the yield curve flattening. Many are concerned about the sustainability of the rotation, as the growth outlook is considered mixed at best, and the rotation is unlikely to persist if we get an energy/inflation/Fed shock, which would ultimately depress growth and lead to a reversal in yields.
In our base case, we will continue to see higher inflation, but also stronger growth. We note that while inflation surprises remain on the upside, economic surprises also appear to have found a floor, which is most evident in the case of the US, but we expect the same for the Eurozone and China.
We believe that the headwinds to growth that have been present in recent months—the slowdown in China, the resurgence of COVID cases associated with the Delta variant, a loss of consumer confidence, and the slowdown in employment—are diminishing. Therefore, based on current CESI (economic surprises) levels, we are likely to see a rebound toward the end of the year.
So, we believe that rising bond yields will be the driving force behind the rotation. US bond yields have risen more than 40 basis points since their August low, and we believe there is more downside ahead, expecting part of the gap between inflation breakevens and bond yields to begin to close.
And not only are yields rising, but the slope of the yield curve has also steepened.
Which sectors are benefiting in this context? In general, the most "value" sectors that are used more directly as inflation hedges (energy sector) and commodities in general, but also the financial sector given the steeper yield curve. Otherwise, the financial sector is significantly exceeding earnings estimates in Q3 2021, with positive surprises of +2.8% in sales and +21% in profits, and relative valuations compared to the general market remain quite attractive.
Investment decline
Humberto Mora
Strategy and Investments
