2021 Global Market Outlook – Q2 Update: The Second Coming

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Vaccines and U.S. stimulus have the global economy on track for a strong rebound in the second half of the year. We expect the reopening trade to favor equities over bonds, the value factor over the growth factor and non-U.S. stocks over U.S. stocks.

Key market themes

After last year’s false start, the prospects for a sustained reopening of economies through the second half of 2021 are promising. The vaccination rollout, plus the latest U.S. fiscal stimulus package—to the tune of $1.8 trillion—has sparked fears that economic growth will accelerate too fast, placing more upward pressure on interest rates. We agree that economies are poised to rebound sharply as restrictions are gradually lifted, but disagree that inflation pressures and interest rates are likely to increase significantly over the next 12 months. We believe it will take until at least the middle of 2022 for the U.S. economy to recover the lost output from the coronavirus-induced lockdowns—and even longer in other economies. Amid this backdrop, we believe that broad-based inflation pressures are unlikely to emerge until 2023—with late 2023 or early 2024 a more likely timing for the first U.S. Federal Reserve (the Fed) rate hike.

The vaccine rollout and large fiscal stimulus have upgraded our conviction in the cycle component of our cycle, value and sentiment (CVS) investment decision-making process. In our view, global equities remain expensive, though the very expensive U.S. market is offset by better value elsewhere. We see sentiment as close to overbought, but not near dangerous levels of euphoria. The strong business cycle gives us a preference for equities over bonds for the remainder of 2021, despite expensive valuations. It also reinforces our preference for the value equity factor over the growth factor and for non-U.S. equities over U.S. equities.

In the U.S., we think long-term interest rates are close to peaking for now, which means the catalyst for value outperformance is unlikely to be as powerful going forward. Even so, we still expect value to perform better than growth, as the value factor is still very cheap compared to the growth factor. In addition, we believe that the latest round of U.S. stimulus, plus the broader reopening from lockdowns, should boost the earnings growth of cyclical sectors such as materials and industrials, which comprise a high weight in the value index.

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The views in this Global Market Outlook report are subject to change at any time based upon market or other conditions and are current as of March 29, 2021. While all material is ...

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