Equity strategy and market outlook – November 2021

In this month’s strategy piece Alastair believes that global markets have rallied as investors take comfort from a benign Q3 earnings season and announcements from central banks which show that in private committee, policymakers seem more dovish than individual policymakers’ public comments suggest. The equity risk premium for global markets remains close to 15-year record lows while corporate credit spreads also remain low. This demonstrates a strong investor appetite for risk at present, even as risks build as economic growth moderates, real wage growth turns negative and China’s property sector remains in distress. Looking forward, we believe investors are not yet properly accounting for the possibility of a medium-term regime change in respect of inflation. Fiscal policy could supersede monetary policy as the primary mode of stimulus in the next downturn. Constrained by above-target inflation, central banks may no longer be best placed to stimulate the economy when required. A higher inflation, fiscally driven economic regime is likely to engender lower market valuations and outperformance of old economy sectors able to offset rising input costs by increasing prices. This process may have already started, with banks and energy leading global sector rankings in 2021 year to date. We remain cautious on global equities as current risk premia are low and we expect forward returns to normalise over the course of 2022 as monetary policy settings become less accommodative. Furthermore, the prospect of a significant sector rotation is increasing in probability as investors start to discount a sustained period of above-target inflation.

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