Head of BofA Global Research
Two things you need before you can start traveling again—money in the bank and fair winds. This week we discuss our forecast for more stimulus/higher rates, findings from our latest travel survey, a bank renaissance and why wind energy is set to outperform (again).
A political “Blue Wave” increases the likelihood of an immediate $1tn COVID stimulus and $2-$4tn infrastructure spending package later in 2021. Mark Cabana, head of U.S. Rates Strategy, warns stimulus could further pressure the dollar and cause Fed tapering to begin later this year. An early Fed taper creates upside risks to our year-end 1.5% 10-year Treasury target and supports our longer-term expectations for neutral rates moving towards 3%.
As a result of the outlook for further stimulus, Quant and Equity Strategist Savita Subramanian moves the Industrial sector to overweight and reiterates her top sector picks of Finance and Energy. We change our outlook on the Tech sector as Savita anticipates a further boost in the rotation from growth to value, which still trades two standard deviations below the historical average relative to growth.
President-elect Biden’s tax plan would have a greater impact on growth sectors (Tech, Healthcare, Services) and higher rates also have a greater valuation impact on longer duration growth stocks.
Our third global travel survey of 25,000 respondents reveals only modest changes in travel expectations over the past 6 months. Two-thirds continue to see travel health risks with concerns about air travel outpacing other parts of the trip.
Chinese travelers seem most comfortable with airplanes, and the British show the greatest fear of flying. Travel restrictions (government and corporate) are the greatest hindrance, except in Japan where lack of vaccine is most often cited. The next trip is 5x more likely to be family/leisure in Europe and 3x in the U.S.—only the Japanese show a greater propensity to travel for business.
Overall, our BofA survey implies that business travel has been permanently impacted—results indicate an approximate 15% decline in global business travel post-COVID, with Americans relatively more pessimistic. Our U.S. airline analyst Andrew Didora favors airlines with more domestic and leisure exposure.
Historically, 75% of bank stock outperformance relative to the S&P 500 occurs in the first year of an economic recovery. Erika Najarian, head of North American Banks Equity Research, sees 2021 as a renaissance for banks and expects a quicker recovery than versus post-Global Financial Crisis.
First, interest rate expectations are already low going into this recovery, and our forecast of rising rates would benefit both bank multiples and earnings. The impact to earnings can be particularly exaggerated this time around, as banks have 2x-10x as much cash compared to post-Crisis. Given sticky corporate and consumer relationships, banks are poised to materially benefit from a recovery in business and card spend in the second half of ’21, offsetting normalizing trading and mortgage revenues.
Stronger balance sheets also translate into more buybacks and M&A. In contrast to the last downturn, COVID was an earnings impact rather than a balance sheet hit. Banks have been overly conservative in setting credit loss reserves, and reversals of excess could accelerate earnings per share (EPS) and book value growth.
Ben Heelan, EMEA Aerospace & Defense analyst, expects 2021 to be another strong year for wind energy despite the potential for installation/auction delays resulting from COVID.
Policy momentum has been positive with the EU Green Deal targeting net zero by 2050, a Biden Administration promising a more supportive U.S. backdrop and renewable tax credit extensions already included in the recent $900bn stimulus package, and China recently adopting a 2060 net zero target. Onshore wind just had a record-breaking year and is set up for another one due to a repowering boost.
There is significant growth potential in the medium term with 25-30 gigawatts (GW) of offshore capacity expected to be awarded in the next 1.5 years. Longer term, our global analysts are bullish on renewable energy given the current pace of solar and wind installations needs to increase by 3-4x in order to meet the Paris Agreement targets.
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