4Q 2021 | Guide to the Markets
Rising bond yields argue for a rebalancing towards value
The Delta variant of Covid-19 has hindered a full return to normality. Our base case is that the impact on activity will be modest compared to former spikes in infection. And ultimately demand will be postponed rather than lost given the tailwinds of healthy consumer balance sheets and strong labour markets (Guide to the Markets – Europe pg 10). Resilient demand alongside ongoing supply bottlenecks are, however, challenging the notion that inflationary pressures will prove entirely transitory and central banks are putting together plans to ease slowly off the monetary accelerator (pg 9). As we look to next year the combination of a broadening recovery and modestly higher interest rates should support value segments of the global stock market (pgs 46 & 63).
China’s strategic ambitions shouldn’t deter medium-term investors
In recent months China has made several regulatory interventions. There are also concerns about the property market given the troubles faced by a major Chinese property developer. This is all part of Beijing’s strategic agenda to promote “common prosperity” given the rise in inequality over the past decade, which is in part due to rising property prices (pg 44). Our interpretation is that Beijing has the willingness and ability to manage any slowdown without systemic risks (pg 40). A focus on modestly lower, but sustainable, growth should not deter medium-term investors from the growth opportunities both in China, and in the Asia region more broadly (pgs 43 & 45).
Options to negotiate the bumps ahead
While our central scenario is benign, we acknowledge that there are tail risks that have the potential to generate volatility (pg 23). Central banks face a difficult balance in the coming months, reacting to inflation concerns but not challenging the market’s view that monetary conditions will remain accommodative. China’s near-term slowdown could also be greater than expected if restrictions required to contain the virus coincide with a more meaningful slowdown in activity (pgs 38 & 39). The difficulty for investors is that government bonds – traditionally the investor’s friend in times of woe – may not cushion a portfolio as effectively as in the past, particularly if the concerns stem from rising inflation (pg 70). Macro funds, and alternatives such as core infrastructure, may provide more effective protection for the potential challenges ahead (pgs 75 & 76).
COP26 sharpens the focus on ESG winners and losers
Global leaders are set to meet in early November for the 26th United Nations Climate Change Conference. Policymakers will be under pressure to both increase their ambitions to cut carbon emissions and to show they have the tools needed to achieve their goals (pg 79). Investors should be alert to discussions around carbon taxes (pg 80), infrastructure development (pg 83) and new regulations to encourage private capital to be part of the solution (pgs 85 & 86). All of which have the potential to affect the outlook for corporate profits, creating both winners and losers from the agenda.