Equity strategy and market outlook – October 2021

In this month’s strategy piece Alastair believes that despite the recent bounce in global equity markets there has been little change in the outlook. Survey data in every major economic region confirm a slowing of growth since the summer while consensus earnings forecasts appear to have completed their COVID-19 related upgrade cycle. High energy prices may reflect a lack of investment in recent years as much as the resurgence in demand during 2021. We observe that capex levels within the listed global oil sector have been sharply reduced since 2016. ESG-focused investors have not rewarded energy investment with higher share prices. This lack of investment suggests that fossil fuel-based energy prices could remain elevated for some time. Furthermore, China’s US dollar high yield market remains under stress. Despite the absence of a formal default by China’s Evergrande to date, the market appears effectively shuttered, with yields on US dollar high yield bonds issued by Chinese corporates still close to 25%. We believe investors should be watching closely for evidence of slower growth in China and any consequent effect on global materials prices. Our cautious position on global equities remains in place. Post COVID-19 normalisation along the dimensions of monetary policy, fiscal policy and economic growth in our view correspond to a high likelihood of a period of normalising equity valuations. Globally, equity valuations remain extended on a price/book and forward P/E basis.

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