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Wealth Management – Mosaique Views

Staying constructive

Expectations of economic growth and profitability are still rising

Dr. Carlos Mejia, CIO, Rothschild & Co Bank AG and Kevin Gardiner, Global Investment Strategist

The global economy is regaining pre-crisis levels of GDP faster than consensus forecasts have suggested, and may continue to grow at an above-trend pace for a while. Expectations may still be too low.

The picture is not completely synchronized. In parts of continental Europe, and sadly in India, contagion is unsettling. However, vaccines are being rolled out, adaptation to a more distanced world continues, and policy remains supportive: the global economic impact has been more muted than feared, with business surveys pointing to resumed growth.

The US economy, however, which is already growing strongly, is about to receive another large fiscal boost, with further proposals on infrastructure waiting in the wings. We are in the middle of a period of very strong growth. China’s initial surge has faded, but it still has momentum, and world trade continue to revive accordingly (ongoing bottlenecks aside).

This backdrop promises a big bounce in corporate profitability, and further opportunities in corporate assets, particularly equities, even after their strong run to date.

We always thought economies would be able to move back towards something approximating “business as usual”. But if economies normalize, so too eventually will policy settings, and bond markets –led by US Treasuries –are beginning to anticipate this. They recognise that a growing economy will exert upward pressure on both real interest rates and (eventually) inflation.

As a result, 2021 is turning out to be better for people and business, but worse for bonds. At some stage, those higher interest rate expectations may trouble stock markets too. But while stock valuations are historically on the high side, they are not prohibitively so, and remain relatively inexpensive when compared to bonds.

Until higher inflation more clearly surfaces in the data – and does so on a sustained basis – the big central banks will likely keep policy rates low. If policy rates stay put, stocks can continue to outperform. Within the market, however, some rotation towards sectors most exposed to short-term (“cyclical”) growth, and away from some of those characterized by a focus on longer-term (“structural”) growth and defensiveness, seems likely to continue.

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