We believe that 10-year rates will rise above 2% over the course of 2021; U.S. core inflation will move towards 3%, and total inflation (including the more volatile food and energy) towards 4%.
In the context of a rising dollar, we are not bullish on emerging markets as a group. Brazil, Indonesia, Mexico, and South Africa, for example, have all borrowed heavily in hard currency and will find their finances challenged as the dollar rises. With U.S. growth looking as strong as it does for the remainder of 2021 — and poised potentially to exceed Chinese growth this year — we would not want to bet against the dollar.
We still like Japan. We are neutral on India and Korea; for many clients, we took profits in India and Korea, and may return to these markets.
Rising inflation and 10-year U.S. Treasury rates will continue to weigh on the most expensive tech stocks; while we remain enthusiastic about tech in general, we offer the same caution we have for some time: don’t be willing to pay anything. Only a PEG ratio below two should be tolerated. We prefer tech names in the “picks and shovels” category of companies whose products are critical for infrastructure buildout in the various expanding tech fields, rather than gravitating towards the best-known and most expensive high-multiple stocks.
We believe cyclicals that can benefit from inflation can do well. We like materials that are important for technology, e.g. lithium and copper, as well as farm- and food-related equipment and materials (farm equipment and fertilizers).
The $900 billion late-2020 stimulus, plus the $1.9 trillion just approved, and the $3 trillion infrastructure bill that may be approved later in 2021, will all contribute to a huge growth in the money supply. Most observers believe that a large tax increase is on the drawing board to finance the coming infrastructure bill. In our view, the market will rally until it realizes that all of the spending will soon be approved, and all that lies ahead after that is taxes rather than spending. That could easily mark the top of the market. We will watch carefully and be prepared when the tax increase hits later in 2021or early 2022.
Thanks for listening; we welcome your calls and questions.
