FV 2021 Global Market Outlook – Q4 Update: Growing Pains

In Canada, growth remains above trend and the odds of additional fiscal expenditures to support the economy have increased. In our view, this means that weaker growth due to COVID-19 is unlikely to change the Bank of Canada's tightening bias.

Economic views

  • U.S. growth
    We believe that the U.S. economy is likely to sustain above-trend growth into 2022, but think that the easiest gains are probably in the rear-view mirror, as the recovery phase of the business cycle matures.
  • Fed rate projections
    Our models suggest that inflation is likely to drop back below the Fed’s 2% target in 2022. If that’s correct, we think the Fed will likely keep interest rates unchanged into the second half of 2023.
  • Impacts of potential U.S. tax increases
    We estimate that higher corporate taxes in the U.S. if enacted, could subtract about four percentage points from S&P 500 earnings growth in 2022.
  • European growth
    Eurozone growth looks on track for a return to above-trend growth over the fourth quarter and into 2022, following the recent slowdown.
  • China outlook
    We believe there is a risk of a sharper-than-expected slowdown in China. Already, credit growth has slowed this year and recent purchasing managers’ indexes have trended lower.

Asset class views

Equities: Preference for non-U.S. equities
We believe stronger economic growth and steeper yield curves after the third-quarter slowdown should favor undervalued cyclical value stocks over expensive technology and growth stocks. Relative to the U.S., the rest of the world is overweight cyclical value stocks.

Fixed income: Government bonds expensive
We think yields should be under upward pressure as output gaps close and central banks look to taper back asset purchases. We expect the 10-year U.S. Treasury yield to rise toward 1.75% in the coming months. 

Currencies: U.S. dollar likely to weaken
The U.S. dollar has been supported this year by expectations for early Fed tightening and U.S. economic growth leadership. We believe it should weaken as global growth leadership rotates away from the U.S. and toward Europe and other developed economies. The dollar typically gains during global downturns and declines in the recovery phase. The main beneficiary is likely to be the euro, which is still undervalued. We also believe British sterling and the economically sensitive commodity currencies—the Australian dollar, the New Zealand dollar, and the Canadian dollar—can make further gains, although these currencies are not undervalued from a longer-term perspective.

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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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