In this month’s strategy piece Alastair believes that there has been a remarkable recovery in equity markets over the past six months and investors should take care not to develop expectations of both having their cake and eating it. If COVID-19 opened the floodgates on both monetary and fiscal stimulus, then as vaccines draw the episode to a close the floodgates will also close once economic pressures and risks have ebbed. He believes investors should distinguish between share price performance driven by earnings recovery and that driven by declining risk premia. In the case of the former, which applies to the cyclical and value segments of the market, improving fundamentals are likely to offset the higher discount rates expected over the next two years. Despite the depth of the COVID-19 recession, credit market spreads are now close to 20-year lows. Credit spreads are tightly linked to the equity risk premium and demonstrate how favourable financial market conditions are for issuers rather than investors. Investors should therefore remain focused on sectors and companies which trade at least within sight of historical valuation norms and which stand to benefit from upgrades provided the COVID-19 recovery remains on track. Growth stocks are likely to continue to suffer from weaker earnings momentum and the expectation of rising discount rates.
A steady rather than sharp convergence between growth and value sector valuations, due to the commitment to gradualism and predictability by the world’s central banks is likely in our view. While recent high inflation figures bear watching, they are not at present a cause for concern. We remain neutral on global equities in aggregate. The opportunities on offer within the value segment of the market remain offset by the relatively extended valuations of growth stocks. In accordance with our view that government bond yields are on a rising trajectory, and corporate debt spreads are close to 20-year lows, we remain underweight both government and corporate bonds.Download PDF