To date, 2021 has been as almost good as it gets for equity investors. At the start of the year, portfolio positioning did not require any heroic assumptions on the availability or otherwise of vaccines, as successful trial results were already in the public domain. Instead, a highly conventional assessment that easy monetary conditions combined with a strong economic recovery would push both corporate profits and equity prices higher sufficed. Global equities have now risen to levels above those prevailing prior to the COVID-19 pandemic with both value and growth indices making new records in the year to date. We believe investors now face a conflict between high equity valuations, but positive momentum in corporate profits forecasts. Key to successfully navigating the next 12 months will be determining when the still-ongoing COVID-19 economic recovery will moderate – and just as monetary policy is likely to be tightened.

Purchasing managers’ survey data appears to have peaked in the US and Europe even if it remains at levels indicative of further expansion during Q4. However, in China, we note that some purchasing managers’ indices are already below 50, raising question marks over current level of global energy and industrial metals prices. Given the equity valuation picture, it is in our view time to be increasingly selective on sector exposures and realistic about return expectations in a global equity market where 50% of sectors are trading 35% or more above long-run price/book multiples, Exhibit 1.