Equity strategy and market outlook – January 2021

In this month’s strategy piece, Alastair believes that global equity and credit markets now offer relatively little risk premium for bumps on the road towards a post COVID-19 recovery. It is remarkable at a time when much of the developed world continues to face a significant degree of COVID-19 disruption and is operating well below trend GDP that forward US price/book multiples are at a 12-year record high and the risk premium for corporate credit risk is at cyclical low. A surge in valuations for more speculative companies also lends weight to the idea of a bubble forming in certain sectors. We believe it is time for investors to stick to a value-based discipline as valuations for the world’s fastest growing stocks have expanded. Vaccines offer hope but no guarantee of a return to ‘normal’ in the short or medium term and the emergence of new and more contagious strains of COVID-19 highlights the new reality that social restrictions may be needed for some time. We expect a continued K-shape recovery as COVID-19 has resulted in a step-change in the nature of economic activity. Digital economic interactions have grown and the shift towards the 21st century economic objectives of new energy and environmental protection have accelerated. These sectoral shifts should be reflected in portfolio asset allocations as they are likely to persist even after the acute phase of the pandemic. While we started the year with a positive outlook on equities, the risk/reward balance is tilted back towards neutral as markets have risen. We now favour relatively COVID-secure and less cyclical sectors, preferring to accept lower expected returns for greater predictability. We remain of the view that bond yields will face upward pressure. Inflation expectations may have increased but real rates remain at record lows.

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