Equity strategy and market outlook – June 2021

In this month’s strategy piece Alastair believes that last week, the US Fed tipped its hand in respect of its tolerance for above-target inflation and its reaction function to the strong recovery in US GDP. In the days following the Fed meeting there has been a minor sell-off in global equity markets as Fed governors try to calibrate their new, more hawkish message. The advent of vaccines means that the COVID-19 pandemic is starting to be viewed by markets as a healthcare problem that can be managed, rather than an economic crisis. Yet when institutional fund managers return to their offices after the summer, the headwinds of tighter monetary policy and shrinking COVID-19 fiscal support in 2022 will be coming into view. By 2022, fiscal spending is forecast to contract in advanced economies, according to IMF projections. To maintain the growth momentum, fiscal spending will have to be replaced by private sector spending and investment. We remain neutral on equities. The outlook is balanced between a degree of overvaluation for developed markets in aggregate against the prospect of another year of very low interest rates and ongoing positive earnings momentum. As each month elapses however, the normalisation of monetary policy draws closer, most recently evidenced by the hawkish turn in Fed policy.

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