BCA Research has released a 29 page strategy outlook for the fourth quarter. The independent investment company has been producing research since 1949. This piece is written by their Chief Global Strategist Peter Berezin.
To make your life easier, we’ve culled the hi-lights and a few charts to give you an idea of what BCA is expecting as financial markets enter what could be a tumultuous three months.
Here are some excerpts:
- Macroeconomic outlook: Global growth faces near-term challenges from a resurgence in the pandemic and the failure of the US Congress to pass a stimulus deal. However, growth should revive next year as a vaccine becomes available and fiscal policy turns stimulative again.
- Global asset allocation: Favour equities over bonds on a 12-month horizon, while maintaining somewhat larger than normal cash positions in the short run that can be deployed if stocks resume their correction.
- Equities: Prepare to pivot from the “Pandemic trade” to the “Reopening trade.” Vaccine optimism should pave the way for cyclicals to outperform defensives, international stocks to outperform their US peers, and for value to outperform growth.
- Fixed income: Bond yields will rise modestly, suggesting that investors should maintain below average duration exposure. Favour inflation-protected securities over nominal bonds. Spread product will outperform safe government bonds.
- Currencies: The US dollar will weaken over the next 12 months. The collapse in interest rate differentials, stronger global growth, and a widening US trade deficit are all bearish for the greenback.
- Commodities: Rising demand and constrained supply will support oil prices, while Chinese stimulus will buoy industrial metals. Investors should buy gold and other real assets as a hedge against long-term inflation risk.
The End Game: What will end the bull market in stocks? As is often the case, the answer is tighter monetary policy. The good news is tight money is not an imminent risk.
The Fed will not hike rates at least until 2023, and it will take even longer than that for interest rates to rise elsewhere in the world.
The bad news is that the day of reckoning will eventually arrive and when it does, bond yields will soar and stocks will tumble.
- Investors who want to hedge against this risk should consider owning more real assets. As was the case during the 1970s, farmland will do well from rising inflation.
- Suburban real estate will also benefit from more people working from home and, if recent trends persist, rising crime in urban areas.
- Gold should also do well. The yellow metal has come down from its August highs, but should benefit from a weaker dollar over the coming months, and ultimately, from a more stagflationary environment later this decade.
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