Peak GDP Growth Shouldn't Worry Investors
Thought of the day
The S&P 500 index has traded within a range over the past two months, while the relative performance of value versus growth and small versus large were also both flat. One reason for this could be investor concerns that US GDP growth is close to a peak, which matters because equity returns historically have been higher when growth is above average and accelerating. The consensus forecast is now for a peak in US growth around the middle of the second quarter as pandemic restrictions are lifted, followed by a return to more normal rates by 2023.
But there are reasons to be cautious about basing investment decisions on literal peaks in growth rates, and we continue to see upside for markets:
- US GDP growth may peak in the second quarter, but the peak in job growth may be a few months away. Job creation in May, while higher than in April, was lower than market expectations, with
the country still 7.6 million jobs below its pre-pandemic level. We think job growth may only peak once schools fully reopen and enhanced unemployment benefits expire. And although growth and vaccination rates may have peaked in the US, they’re still on the upswing in Japan and parts of emerging markets.
- Inflation concerns should peak soon. The US consumer price index for May, to be released later this week, is likely to be the high point in this cycle at close to 5%. We expect CPI inflation to moderate for the rest of the year, easing investor inflation concerns.
- Policy stimulus remains a powerful tailwind. During the depths of the pandemic, policy helped to support the economy. But now that total GDP is above pre-pandemic levels, the Federal Reserve buying USD 120bn of bonds per month is arguably more stimulative for the economy, as evidenced by record loose financial conditions.
Market update
CSI 300 +0.2%, amid mixed trading in Asia.
GBPUSD +0.1%, trading at 1.4165.
Brent crude oil +0.7%, to USD 72.7/bbl.
What to watch: 9 June 2021
- Germany April trade balance and current account balance
- US final April wholesale inventories
This report has been prepared by UBS AG and UBS Financial Services Inc. (UBS FS) and UBS AG Hong Kong Branch and UBS Switzerland AG. Please see important disclaimers and disclosures at the end of the document.
So, while concerns about peak growth in the US may have taken some wind out of the market’s sails, we think investors should look at other offsetting tailwinds. We expect the cyclical recovery momentum to persist in the second half of the year, albeit with some bouts of volatility. We advise investors to position for further upside, with a focus on beneficiaries of reflation and reopening, and look at how to use periods of volatility to invest and protect their portfolios. Click here for more.
Caught our attention
- China’s factory inflation jumps. China’s producer price index (PPI) for May increased 9% y/y, the fastest pace in over 12 years due to surging global commodity prices and a low base of comparison. On a m/m basis, the PPI rose 1.6% in May, up from a 0.9% increment in April. However, soaring producer prices have yet to feed through to China’s consumer inflation, with the consumer price index (CPI) rising 1.3% y/y in May, lower than the consensus forecast of 1.6%. It is also well below the government’s official target of about 3%. We continue to believe that the recent spikes in inflation data will prove transitory due to the lower base effect and temporary supply constraints. With headline CPI likely to stay modest in the coming months and PPI to moderate later this year, we expect a limited monetary policy response and believe that the macro backdrop remains benign for stocks. We recommend investors to position in value and cyclical sectors in the near term to ride on the global reflation trade.
- Japan upgrades first-quarter GDP. The nation's economy contracted less than originally reported in the first quarter, shrinking by 3.9% annualized rather than 5.1% in the preliminary reading. In separate data, real wages posted the largest jump in more than a decade. Japan has been lagging global markets, reflecting a slow vaccination program and an extended state of emergency. But we think Japanese equities are poised to play catch-up. Japan benefits disproportionately from accelerating global growth, and earnings will get a boost from a weaker yen. As a result, Japan is among our most preferred stock markets.
Click here for more on positioning for reflation, and here for more on seeking opportunities in Asia.
