May 2021 / MARKET OUTLOOK
Global Asset Allocation: May Insights
Discover the latest global market themes
1. Market Perspective
- Global economic growth is expected to begin peaking in the coming quarters as the impacts of economic reopening and fiscal stimulus are realised.
- Global inflation expectations are likely to trend higher as the consumer demand surge is met with signs of supply shortages and as the Fed promises to keep a zero interest rate policy until the labour market rebounds.
- Asian and European economies should benefit amid the recovery given their higher cyclical exposures, although recent resurgence in coronavirus cases in major Asian economies is a growing concern.
- Key risks to global markets include the resurgence in coronavirus cases, pace of vaccinations, rising inflation, geopolitical concerns, and potential for higher taxes as countries pivot to funding recovery costs.
2. Portfolio Positioning
- We increased our underweight in equities relative to bonds and cash as the risk/reward profile looks less compelling for equities after a strong rebound from March 2020 lows. Equities could be vulnerable to potential setbacks in the recovery, fading policy support and higher taxes.
- We increased the overweight of euro versus the US dollar. The recent dollar weakness should continue as the US policy stance remains very loose and the European re-opening accelerates in the spring. Europe is also a major beneficiary of the current global manufacturing boom.
- Within equities, we are further tilting into value globally, based on more attractive relative valuations and expectations for cyclical companies to continue to benefit from the improvement in growth from a recovering global economy—bolstered by fiscal stimulus in the US, increasing commodity prices and higher interest rates.
3. Market Themes
As first-quarter earnings season comes to an end, the biggest surprise has been the ‘surprises’ themselves, in terms of how much companies have beat earnings expectations. First-quarter expectations were for a near-20% increase in S&P 500 earnings, but companies have blown past that estimate, approaching a 45% year-over-year gain. Ironically, this was not the first quarter for massive surprises as companies have significantly exceeded expectations throughout most of the pandemic, particularly as many technology companies benefited exponentially early on from the lockdowns. The surprises this quarter, however, have been led by more cyclical companies in the energy and consumer discretionary sectors. While seemingly all positive news, price reaction to earnings beats was muted this quarter, suggesting investors may be rationalising high valuations with a normalisation in future earnings or perhaps the mounting pressure from rising input costs.
A renewed surge in coronavirus cases across several emerging markets (EM) countries—including India, Brazil, and Argentina—is weighing heavily on these economies as they struggle with insufficient medical infrastructure and access to vaccines. In addition, higher interest rates, rising inflation, a strengthening US dollar, and moderating growth in China have investors concerned about emerging markets prospects. EM have lagged developed markets (DM) year‑to‑date and with much of the economic recovery appearing priced into many DMs emerging markets may have more room to advance as the global recovery takes hold. With commodity prices still on the rise, expectations for a weaker US dollar, and a continued dovish stance from the Fed, we think emerging markets may be in a strong position to rebound—assuming that they can navigate the crosscurrents.
For a region-by-region overview, see the full report (PDF).
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