Global Asset Allocation: May Insights

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, European and British economies should benefit amid the recovery given their higher cyclical exposures, although the recent resurgence in coronavirus cases in major Asian economies is a growing concern.
• Key risks to global markets include the resurgence in coronavirus cases, the pace of vaccinations, rising inflation, geopolitical concerns, and the 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 closed our underweight in the euro versus the British pound because most of the good news for the pound is already priced in, while we also expect euro strength on the horizon.
• 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

Surprise

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 benefitted 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.

Crosscurrents

A renewed surge in coronavirus cases across several emerging markets (EMs)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. EMs have lagged developed markets (DMs) 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).