Investors Don’t See End to Record-Breaking Equity Rally Just Yet
(Bloomberg) -- As stocks around the world continue to smash one record after another, some of the world’s biggest money managers have a simple message: Get used to it.
The likes of BlackRock Inc., State Street Global Markets, UBS Asset Management and JPMorgan Asset Management expect equity markets to keep rising in the second half of the year, with many investors increasingly looking outside the U.S. for more returns.
Globally, the asset class’s allure amid a continued economic rebound is proving too hard to resist, even though the MSCI All-Country World Index has already sailed 12% this year to an all-time high. While some market players caution about risks of a dip given punchy valuations, the sharp bounce in corporate earnings and strong central bank support are expected to keep the rally alive.
“Vaccination is accelerating globally, major central banks remain extremely accommodative, fiscal support is still present and earnings continue to recover,” said Esty Dwek, head of global market strategy at Natixis Investment Managers. “In such an environment, it is difficult to imagine a very negative scenario for equities.”
Of course, pitfalls abound. Here is a look at some of the factors keeping investors hooked on equities despite the risks:
No Place Like Equities
One reason behind the rally in equities is that there is still nothing as attractive as stocks out there, given that developed-market government bond yields remain lackluster and credit spreads have tightened to their lowest levels in over a decade.
That is coupled with a lot of pent-up demand, now that economies are reopening following last year’s lockdowns. Goldman Sachs Group Inc. strategists recently flagged that U.S. money-market fund assets have ballooned to a record $5.5 trillion during the pandemic, showing that there is a lot of cash on the sidelines.
“Many indicators suggest there is still overwhelming liquidity in the system that is looking for a home,” said Carsten Roemheld, capital markets strategist at Fidelity International.
Given strong support from global central banks, flows will continue to go into equities, though return expectations should be much lower from here, Roemheld added.
Looking ahead, investors have a preference for cyclical and value stocks overall, which are set to benefit most from a rebound in growth. In terms of regions, many professional investors said that they preferred Europe, which is set to get a boost from its high exposure to such equities, and Japan, whose stock market has lagged the U.S.
Easy Does It
While worries that the U.S. Federal Reserve is going to tighten policy more quickly than expected ruffled markets last month, investors still don’t see the central bank raising interest rates any time soon, or at least not too rapidly.
Overall, market players expect central bank policy to remain accommodative in order to support economies emerging from the chaos of the pandemic.
“For now, monetary policy 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 recovery in earnings growth as key to fueling the equity rally. Globally, profit expectations have bounced back to pre-pandemic levels, and nearly 50% of S&P 500 companies have raised their full-year outlook over the past three months, one of the highest percentage levels since 2010.
“A suggestion of better times ahead alone will no longer do the trick and investors will want some real evidence of growth or free cash flow,” said Max Anderl, a 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 developed countries have made with their vaccination programs are keeping investors’ nerves calm.
“We still see the success in vaccinations and economic re-opening as the key driving force behind improving economic and earnings outlook, and ultimately equity market gains,” said Marija Veitmane, senior multi-asset strategist at State Street Global Markets.
It could be harder to generate equity returns, though, given much of the reopening optimism is priced in. Seema Shah, chief global strategist at Principal Global Investors, said that investors need to be more selective about what regions, sectors and styles they choose.
“Within equities, cyclicals and value should continue to benefit from the likely surge in consumer spending, but investors should also consider secular growth stocks, such as mega-cap technology,” Shah said by email, adding that these firms are set to benefit from a permanent move toward cloud computing and dependence on technology.
One could argue that the set-up for equities is simply too good, with economic indicators in both the euro area and U.S. running red-hot. But even this isn’t necessarily seen as a problem.
“When you look in the past, the peak in leading indicators doesn’t mean markets will be down,” Claudia Panseri, a global equity strategist at UBS Global Wealth Management, said by phone. “The market is usually down quite a bit when you have growth scares and when you believe that there will be a strong tightening or big change in the monetary policy. And I think that both conditions are still not in place to have a major correction.”
While stretched valuations could be seen as a barrier to further gains, investors aren’t too worried. Patrik Schowitz, global multi-asset strategist at JPMorgan Asset Management, said that while he expects equity valuations to decline further, that should be driven by earnings rising faster than stock prices, instead of by weak markets.
Though investors expect global stocks to continue rising, they warned that so could volatility. The Cboe Volatility Index, or VIX, has been languishing at its lowest level since before last year’s pandemic-fueled selloff. Indeed, the Nasdaq 100 Index has reached an overbought level, which over the past year led to some declines in the short term.
For some market watchers, like BlackRock’s co-chief investment officer of fundamental equities Nigel Bolton, any pull-backs would be buying opportunities, though.
“We see really strong earnings growth, not just for this year, not just the bounce back, but actually going forward into 2022 and also, at a slower pace, into 2023 as well,” BlackRock’s Bolton said by phone. “So all of those factors are the reasons why you are still looking at a bull market and we will have wobbles on the way.”
©2021 Bloomberg L.P.