The global economy is recovering at a much faster pace than after past recessions. Meanwhile households have accrued massive amounts of savings. As vaccine rollouts continue, a key question is – where do we go from here? While growth, inflation, interest rates, credit spreads, and valuations still matter, investors need to interpret these factors with particular care in such an unusual environment.
Valuations are historically expensive for most asset classes, which has led to concerns that investors have become too optimistic. In the second half of 2021, much could depend on whether valuations are supported by accelerated earnings growth. Long-term secular themes will endure, and cyclical recovery may create opportunities in value stocks. However, continued economic and business disruption suggests that diversification and careful security selection will remain critical to success.
Although short-term interest rates remain near zero, and major central banks show no current inclination to raise them, bond yields rose sharply in early 2021. Low but rising yields and a steepening yield curve could lead to further episodes of market volatility in the second half of the year. High yield bonds, floating rate bank loans, and emerging market debt (including local currency) still appear to offer opportunities. However, credit spreads have tightened considerably, leaving less margin for error in sector and/or security selection.
China’s extraordinary economic, social, and financial transformation over the past two decades appears poised to accelerate as result of the pandemic. There is a significant opportunity to uncover the alpha potential of its growing and diverse market in consumer spending and health care amid demographic shifts, technological innovation, and sustainability ambitions. These opportunities also come with complexity and risk.
This material is provided for general and educational purposes only and not intended to provide legal, tax, or investment advice. This material does not provide recommendations concerning investments, investment strategies, or account types; it is not individualized to the needs of any specific investor and not intended to suggest any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making.
Past performance cannot guarantee future results. All investments are subject to market risk, including the possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market.
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