Navigating transition - Setting the course for H2 2021
CIO MONTHLY | AUGUST 2021
This month we set the course for H2 2021 to best navigate the period ahead. We remain overweight equities relative to fixed income but move more underweight government bonds and temper the cyclicality in our regional equity tilts.
- The macro transition is under way – It appears increasingly clear that the global growth cycle is passing its peak. It’s also clear that central banks have started down the path to a less dovish stance. However, beyond the next couple of quarters, it’s almost certain that growth will normalise to a healthy pace in 2022, and central banks are unlikely to have moved much away from near-zero policy rates this year or next.
- Market sentiment is being confronted by a number of risks to the outlook – The spread of the Delta COVID-19 variant is seeing a pick-up in new cases and there are concerns the outbreak could still dent the growth recovery. The coming months will reveal the extent inflation proves sticky and threatens the outlook, and there is uncertainty of how central banks will behave in this environment. Finally, there’s always the risk that simmering tensions between the US and China could boil over.
- Earnings growth should remain strong through 2022 – We remain in favour of European and UK markets where, relative to the US, more of the growth recovery lies ahead and valuations are more supportive. We remain overweight domestic equities, given Australia’s still durable growth recovery and strong earnings upgrade cycle ahead.
- Stay short duration in fixed income – We recommend staying short duration and to increase high quality income-bearing assets within fixed income portfolios. Credit markets appear relatively expensive given tight spreads, but the healthy return pick-up over bonds should keep the market well supported.
- In alternatives, we favour real assets and private equity – While the growth momentum has peaked relatively quickly, it’s arguably still early in the economic cycle from an historical perspective. This supports allocations to private equity. We also favour real assets for their defensive bond-like returns and inflation protection.