Equity strategy and market outlook – July 2021

In this month’s strategy piece Alastair believes that volatility has risen as investors baulk at high equity valuations. Global equities are now trading at a 15-year high forward price/book, suggesting that only modest returns are on offer for long-term investors. This is not necessarily irrational in the context of very low yields available in other asset classes. However, the recent market sensitivity to above-consensus inflation data and slowing US survey data suggests that markets may struggle to make further progress until investors have more visibility on 2021 profits growth. 2021 earnings forecasts have resumed their upward trajectory during July. He notes that while sectors exposed to rising input prices may now be under margin pressure, commodity and energy sectors are still benefiting from upgrades. The UK may have brought ‘delta’ under control after a worrying period of escalation. Initial fears of an explosion of cases of the highly infectious COVID-19 variant have given way to relief as case numbers have fallen to one-half of peak levels while hospital admissions remain low. This may be a helpful precedent for other regions. He remains neutral on equities. The outlook is balanced between a degree of overvaluation for developed markets in aggregate against the prospect of another year of very low interest rates and ongoing positive earnings momentum. However, he believes that investors should take the opportunity to realise profits in currently overvalued sectors, while investor sentiment remains strong.

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