As stocks around the world continue to break record after record, some of the world’s top fund managers have one simple message: get used to it.
Companies like BlackRock Inc., State Street Global Markets, UBS Asset Management and JPMorgan Asset Management expect equity markets to continue to climb in the second half of the year, with many investors increasingly looking outside the United States for more returns.
Globally, the attractiveness of the asset class amid continued economic rebound is proving too hard to resist, even though the MSCI All-Country World Index has already climbed 12% this year to a low. record level. While some market participants warn of downside risks given the hard-hitting valuations, the sharp rebound in corporate earnings and strong central bank support should keep the rally alive.
“Vaccination is accelerating globally, major central banks remain extremely accommodating, budget support is still present and profits continue to recover,” said Esty Dwek, head of global market strategy at Natixis Investment Managers. “In such an environment, it’s hard to imagine a very negative scenario for stocks.”
Of course, there are plenty of pitfalls. Here’s a look at some of the factors that keep investors hooked on stocks despite the risks:
No place like stocks
One of the reasons for the rally in equities is that there is still nothing as attractive as equities, given that developed market government bond yields remain poor and credit spreads decline. are tightened to their lowest level in over a decade.
With that comes strong pent-up demand, now that economies are reopening after last year’s lockdowns. Goldman Sachs Group Inc. strategists recently reported that US money market fund assets hit a record $ 5.5 trillion during the pandemic, showing that there was a lot of money on the sidelines.
“Many indicators suggest that there is still overwhelming liquidity in the system that is looking for a home,” said Carsten Roemheld, capital markets strategist at Fidelity International.
Given the strong support from global central banks, flows will continue to flow into equities, although return expectations should be much lower from here, Roemheld added.
Looking ahead, investors have a preference for cyclical and value stocks overall, which should benefit the most from a rebound in growth. In terms of regions, many professional investors said they prefer Europe, which should benefit from its high exposure to these stocks, and Japan, whose stock market has lagged behind the United States.
While fears that the US Federal Reserve might tighten policy faster than expected, rocked markets last month, investors still don’t see the central bank raising interest rates anytime soon, or at least not too quickly. .
Overall, market participants expect central bank policy to remain accommodative in order to support economies emerging from the chaos of the pandemic.
“For now, monetary and fiscal policy remain loose around the world and, in reality, it will be some time before rates start to rise,” said Ben Lofthouse, head of global equity income at Janus Henderson Investors.
All about earnings
Many investors see a resumption of earnings growth as the key to fueling the equity rally. Globally, earnings expectations have returned to pre-pandemic levels, and nearly 50% of S&P 500 companies have raised their annual outlook in the past three months, one of the lowest percentage levels. higher since 2010.
“The mere suggestion of better times ahead will not be enough and investors will want real evidence of growth or free cash flow,” said Max Anderl, portfolio manager at UBS Asset Management in London.
While the emergence of more highly transmissible variants of the virus is a big risk, the progress made by developed countries in their vaccination programs is keeping the nerves of investors calm.
“We still view the success of vaccinations and economic reopening as the primary driver of improved economic prospects and earnings, and ultimately stock market gains,” said Marija Veitmane, senior multi-asset strategist at State Street Global Markets.
However, it might be more difficult to generate returns on equities, given that much of the optimism of the reopening is taken into account. Seema Shah, chief strategist at Principal Global Investors, said investors need to be more selective about the regions, sectors and styles they choose.
“Within equities, cyclicals and value should continue to benefit from the likely rise in consumer spending, but investors should also consider secular growth stocks, such as mega-cap tech,” Shah said. via email, adding that these companies stand to benefit from a permanent shift towards cloud computing and reliance on technology.
One could argue that the stock setup is just too good, with economic indicators in both the Eurozone and the US turning red. But even that is not necessarily seen as a problem.
“When you look into the past, the peak in leading indicators doesn’t mean the markets are going to go down,” Claudia Panseri, global equity strategist at UBS Global Wealth Management, said by phone. “The market is usually quite low when you have fears about growth and when you think there will be a big tightening or a big change in monetary policy. And I think the two conditions are still not in place to have a major correction. “
While strained valuations can be seen as a barrier to further gains, investors are not overly concerned. Patrik Schowitz, global multi-asset strategist at JPMorgan Asset Management, said that if he expects stock valuations to continue falling, it should be due to earnings rising faster than stock prices, rather than weak markets.
Although investors expect global stocks to continue to rise, they have warned that volatility could as well. The Cboe volatility index, or VIX, is stagnating at its lowest level since before the sell-off caused by last year’s pandemic. Indeed, the Nasdaq 100 index has reached an overbought level, which has led to some short-term declines over the past year.
For some market watchers, like Nigel Bolton, co-director of fundamental equity investments at BlackRock, any pullback would constitute a buying opportunity, however.
“We are seeing very strong earnings growth, not just for this year, not just for the rebound, but for the future in 2022 and also, at a slower pace, through 2023,” BlackRock’s Bolton said by phone. “So all of these factors are the reasons why you are always watching a bull market and we will have some swings going on.”