By: Graham Wainer
There are reasons to be optimistic where the pandemic and the recovery is concerned
The past three months has seen the market cycle transition from a strong ‘relief rally’, which started at the end of March 2020, to a more typical ‘mid-cycle’ phase. Global equities declined by c. 1% in US Dollar terms[1], marking the first quarterly decline since Q1 2020.
The concept of ‘peak growth’ has dominated market sentiment with earnings and economic growth rates declining from high levels. Meanwhile, inflation fears continue to linger as higher commodity prices and disrupted supply chains feed through. The threat of persistent ‘stagflation’, when weak economic growth combines with high inflation, has pushed bond yields higher and rattled investors’ nerves.
Without doubt, the outlook has become more balanced compared to earlier this year. This is common in the second year of a post-crisis recovery. However, we retain a constructive view towards equities, particularly when compared to traditional fixed income investments. A strong consumer market, continued policy support and an improving covid-19 situation underpin a resilient global economy, which we expect to support further earnings growth in 2022.
Depleting availability in global supply chains and further energy shortages pose a key threat in the coming months, with inventory levels in key markets significantly lower than normal. Much of what we are seeing today reflects the uneven path out of the pandemic. Demand and supply dynamics have been disrupted across industries for more than 18 months, but we see good reason to expect a gradual normalisation. We consider what is driving the inflation fears, the likelihood of its persistence over time, and what the market is currently anticipating from core inflation readings.
Our global multi-asset strategy includes dedicated allocations in Asia and broader emerging markets, which we increased earlier this year. The region has been at the centre of a number of investor concerns, particularly in China where regulatory reform has raised uncertainties about shareholder treatment in certain industries. The property market has also revealed its fragility as one of China’s largest property developers, Evergrande, warned of a high risk of default. We retain the increasingly contrarian view that the Asian market has considerable growth potential over the long term.
[1] Source: Bloomberg
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