2Q 2021 | Guide to the Markets
The recovery in H2 is likely to be very strong, though not entirely even
The combination of massive fiscal support and a lack of ability to spend over the past year has resulted in an enormous accumulation of household savings in all major economies (Guide to the Markets – UK pg 10). Add in President Biden’s latest stimulus and we may see US demand expand like a coiled spring in the coming months (pg 25). The UK looks to be on a similar trajectory, but other parts of Europe are playing catch up given a slower pace of vaccine rollout (pg 34). The outlook in emerging economies is similarly uneven, with Asia containing the virus more successfully than Latin America.
The central banks have a goldilocks challenge ahead – not too hot, just right
So long as the bounce back in demand does not prompt companies to lift prices sharply higher on a sustained basis (pg 7), the Federal Reserve will be able to maintain accommodative monetary policy (pg 24). But the central banks have a goldilocks challenge ahead to demonstrate they will let the expansion run warm, but not too hot. As a result, we may see further modest upward pressure on long-term interest rates, and potentially bouts of broad market volatility (pg 71). This environment creates challenges for portfolio construction since government bonds are supposed to act as ballast in portfolios but currently represent one of the main sources of portfolio risk (pg 76). Adding real estate, core infrastructure and macro funds may help to dampen portfolio volatility (pgs 80 & 81).
There is still scope for cyclical catch up for last year’s losers
We expect higher long-term rates to add further fuel to the recent outperformance of last year’s losers (e.g. financials) relative to last year’s winners (e.g. tech, pg 50). Cyclical sectors have more scope for further rises in earnings expectations, which should help offset any drag from a rising discount rate (pg 68).
Focus on secular themes for diversification and long-term returns
A focus on reasonably valued assets that are supported by secular themes should help portfolios over the long run. Sectors and companies that will benefit from the drive to combat climate change could be an option, though we see better opportunities in areas less obvious than renewables, such as the industrials that will help with energy efficiency (pg 86).
Position for growth in Asia’s decade
Investors should also make sure their portfolios are positioned today for the growth of the future. The rising middle classes in Asia remain a key source of global consumer demand (pg 47), and maturing capital markets mean that investors increasingly have better opportunities to access those future earnings.