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The tantalizing prospect of normality 

  • Macro: New restrictions in Europe and the US will weigh on economic activity in the near term. Vaccines and medical treatments for COVID-19 are expected to gradually support a recovery in 2H21 and set the economy on course for solid growth in 2022. Monetary policy is likely to remain very loose as inflation undershoots target levels.    
  • FI: After marking new record lows in 2020, we expect long-term Bund and UST yields to move higher and reach          -0.30% and 1.30%, respectively, by YE 2021, with curves bear-steepening. Real yields are set to stay well below zero over the next year. We forecast that the 10Y BTP-Bund spread will trade around 115bp throughout 2021. 
  • FX: Risk appetite will be a key driver of G10 FX and we think that more weakness lies ahead for the USD. We target 1.28 for the EUR-USD at YE 2021. We also expect the impact of Brexit on the UK economy to send EUR-GBP to 0.94 and we project that EUR-CHF will rise to 1.11. USD-JPY will likely drop below 100. 
  • Equities: With strongly recovering company earnings, we forecast double-digit returns for European equities in 2021, although the path towards higher prices might not be smooth. After a solid 2020, we expect defensive sectors to lose appeal and recommend broadly cyclical exposure.
  • Credit: Squeezed by asset purchases and low net supply, IG credit spreads seem set to tighten to historical lows in 2021. We think that lower tiers of the capital structure and HY will attract good demand and deliver interesting returns. Yield hunting and solid credit quality also speak for tighter spreads across EM hard-currency credit. 

Source: UniCredit Research – The UniCredit Macro & Markets 2021-21 Outlook, 19 November 2020, 
Executive summary