FV 2021 Global Market Outlook – Q4 Update: Growing Pains

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The COVID-19 delta variant, inflation, and central bank tapering are unnerving investors. We expect the pandemic-recovery trade to resume as inflation subsides, infection rates decline and tapering turns out to not equal tightening. Amid this backdrop, our outlook favors equities over bonds, the value factor over the growth factor, and non-U.S. stocks over U.S. stocks.

Key market themes

The post-lockdown recovery has transitioned from energetic youthfulness to awkward adolescence. It’s still growing, although at a slower pace, and there are worries about what happens next—particularly around monetary policy and the outlook for inflation. While the inflation spike has been larger than expected, we still think it’s transitory, caused by base effects from when the U.S. consumer price index fell during the lockdown last year and by temporary supply bottlenecks. We believe that inflation may remain high through the remainder of 2021, but should decline in early 2022. This means that even though the U.S. Federal Reserve (the Fed) is likely to begin tapering asset purchases before the end of the year, we see rate hikes as unlikely before the second half of 2023.

Another market concern is the highly contagious COVID-19 delta variant. The evidence so far, however, shows that vaccines are effective in preventing serious COVID-19 infections. With vaccination rates accelerating globally, we believe that the broader economic reopening should continue through the rest of 2021.

Our cycle, value, and sentiment (CVS) investment decision-making process leads us to conclude that global equities remain expensive, with the very expensive U.S. market offsetting better value elsewhere. Sentiment is slightly overbought, but not close to dangerous levels of euphoria. The strong business cycle gives us a preference for equities over bonds for at least the next 12 months, despite expensive valuations. It also reinforces our preference for the value equity factor over the growth factor, and for non-U.S. equities to outperform the U.S. market. We believe that the reopening trade should resume in the coming months, given that the cyclical stocks that comprise the value factor are reporting stronger earnings upgrades than technology-heavy growth stocks. In addition, the value factor is cheap compared to the growth factor.

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Disclosures:

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions ...

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