Investment Perspectives 2021 | Mid Year review & Outlook

Executive Summary

The economy is largely recovering as expected

Eighteen months after the onset of the Covid-19 pandemic, the global economy is experiencing its most robust post-recession recovery since World War II. The rebound is, however, very uneven across countries, as major economies are faring much better than many developing ones. Some countries have nearly lifted all their restrictions while others remain constrained by a resurgence of Covid-19, or by the fast spreading of the Covid-19 Delta variant. According to the World Bank, global growth is expected to accelerate to 5.6% this year, in large part thanks to the strength of the US and China. The level of global GDP in 2021 is still expected to be around 3.2% below pre-pandemic projections, despite this year’s recovery. For the remainder of the year, the outlook looks favourable for the US and for Europe but more complicated for the Asian region.

Fiscal stimulus continues to be supportive

Monetary support has reached its peak, but it is still massive, however fiscal support will continue to significantly impact economies in the years ahead. As in the case of vaccine rollouts, fiscal support has been very uneven across the different regions and the recovery is set to be unequal between countries, with developing economies forecasted to take longer to regain their pre-pandemic activity levels. Advanced economies have already benefited from much larger fiscal packages and they will continue to do so in the future. In Europe, the recovery plan is significant in size, while the different US relief bills have already amounted to more than a quarter of US GDP. An additional $1.2 trillion US infrastructure bipartisan plan is on the brink of being approved, while a separate bill designed to fund key Democrat priorities could also be pushed through the reconciliation process. All this to say that fiscal stimulus is far from being exhausted.

The second half likely to be more challenging for financial markets

Financial markets have been rewarding so far this year, mainly thanks to the contributions of equities, emerging market debt and high-yield bonds. Volatility has also been trending lower in a context of strong appetite for risk assets. The quarters ahead, however, are likely to produce more modest returns for the portfolios and the risks of higher volatility are rising. In view of elevated inflation risks and our expectations of higher bond yields, our fixed-income exposure has an overall low duration risk and a very underweight allocation to investmentgrade bonds. We still believe that it is too early to go into an overly defensive mode, hence our significant exposure to risk assets. The markets’ focus will continue to be on inflation risks and on the Federal Reserve’s communication as to how and when they will start to withdraw some of their support to the markets. Were high levels of inflation to persist, the pressure on the Fed will only keep increasing and markets could lose some of their serenity.

We maintain a dynamic positioning of the portfolios

Our portfolio positioning remains dynamic with an overweight towards equities, a low level of cash and a fixed-income allocation which is focused on emerging market debt, high yield credit and convertible bonds. Our equity allocation is well diversified across investment styles, regions, and market capitalisations. Our assessment is that European and UK equities still offer significant catch-up potential, and we are also confident about the capacity of our Japanese equity exposures to bring worthwhile contributions to the portfolios in the quarters ahead. The main driver of credit performance will be carry as further spread compression will be limited, and we expect convertible bonds to perform better, in relative terms, than during the first semester. In the next section of the document, we will evaluate the macro environment and the prevailing financial conditions by highlighting several key indicators that we observe. Following a brief overview of the first half returns of the different asset classes, we will outline our current market outlook and asset allocation.


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