Incoming economic data continue to support our view that global growth is expected to broadly peak in 2021.
This phenomenon of peak growth is happening alongside the fact that the strength of the global stimulus impulse on a year-on-year basis, in both monetary and fiscal terms, will also begin to wane as we enter 2022.
We believe that the process of navigating the respective peaks in economic growth and stimulus impulse will be key market drivers ahead.
In emerging markets, despite a resurgence in Covid-19 cases and the reinstatement of mobility restrictions in some Asian economies, Chinese policy makers are giving clear signals that they have begun to normalize monetary policy alongside strong momentum in its domestic economy.
Given that credit creation is historically a significant driver of Greater China markets, we remain watchful of the effects of monetary normalization on Chinese risk assets.
Although the Covid-19-driven crisis was one of the deepest in recent history, it was also one of the shortest in terms of the peak-to-trough market decline and recovery in merely six months from March to August 2020, as the market cycle was accelerated by decisive and unprecedented policy action and abundant system liquidity.
As we enter 2H 2021 and draw nearer to 2022, we see the market beginning its transition into a post-growth peak phase.
History suggests that while the post-pandemic bull market will remain intact, we expect lower, albeit still positive returns, with a higher scope for price volatility.
In this new, more mature, mid-cycle market phase, we expect to see earnings growth play a greater role in driving price appreciation, in contrast to price-to-earnings multiple expansion driven by lower real rates in the early recovery phase.
We also expect greater dispersion of returns, in contrast to a “rising tide lifts all boats” dynamic driven by stimulus and liquidity over the last 18 months.
In other words, for investors, the role of alpha in driving portfolio returns will play an increasingly important role relative to beta that has largely driven portfolio performance during the initial post-pandemic recovery phase.
Over the next 3 to 6 months, we continue to see more legs in terms of performance from cyclical sectors, such as financials, industrials, materials, energy and real estate, and similarly expect beneficiaries of inflation to perform well as investors increasingly incorporate inflation hedges into their portfolios as inflation fears escalate.
Closer to 2022, as we transition more deeply into a mid-cycle market, we expect companies with solid earnings growth prospects, such as blue-chip names in high growth technology sectors, to resume their key roles in driving portfolio returns. This is especially so as inflation fears and upward pressure on US Treasury yields begin to subside in a post-growth peak environment.
We remain positive on the broad market outlook by maintaining an overall overweight position in equities through an overweight position in US equities while we bring our position in Asia ex-Japan equities to neutral. Within Asia equities, we remain positive on China, Hong Kong and Singapore equity markets, and we hold a cautious stance on India and Thai equity markets.
In the fixed income space, we hold underweight positions in Developed Markets and Emerging Markets Investment Grade Bonds as we remain overall cautious on duration risk, and we hold an overweight position in Emerging Market High Yield bonds as valuations and fundamentals remain attractive in our view.
