In this month’s strategy piece Alastair believes that the impact of the positive benefits from the policy responses to COVID-19 may have peaked and the time for tighter global monetary conditions is nearing.
Market volatility is likely to rise during the autumn as policymakers negotiate their first steps away from COVID-19 support towards more neutral settings, consistent with the closing of output gaps in developed market economies. Investors may be focused on Fed ‘tapering’ but the bigger risk is to economic growth.
The persistence of the ‘delta’ variant infections despite comprehensive vaccination programmes suggests that further relaxation of social restrictions is becoming less likely in developed markets.
In China, purchasing managers’ indices (PMIs) have peaked and bond yields are falling as growth slows, suggesting pricing of industrial commodities and energy may soften. At high valuations, global equities continue to walk a tightrope.
Global equities are still trading at a 15-year high forward price/book. While this is not necessarily irrational in the context of very low yields available in other asset classes, it is suggestive of only modest returns for long-term investors.
‘Heightened vigilance is in order for the autumn as the prospect of tighter monetary conditions draws closer’
There are two ‘known’ risks which may yet prove problematic.
The most obvious is that the goalposts have shifted on the ‘delta’ variant of COVID-19 from suppression to tolerance of endemic levels of disease and as a result further social restrictions cannot be excluded during the autumn.
Secondly, and arguably more importantly for markets, medium-term inflation expectations have risen sharply in the United States which may yet constrain the US Federal Reserve. However, consensus earnings forecasts continue to offer support for global markets in the very near term.
2021 earnings forecasts have continued their upward trajectory during August. While unquestionably helpful for sentiment in the short term, we do question for how long this can persist as PMIs retrace from peak levels.
We maintain a neutral position on global equities, balancing valuation concerns against still strong earnings momentum.
However, we suggest heightened vigilance is in order for the autumn as the prospect of tighter monetary conditions draws closer.
As developed market economies return to trend levels of activity, economic growth is likely to slow just as central bank policies take their first steps on the path to policy normalisation.
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