2021 Global Market Outlook – Q3 update: The song remains the same

The global economic reopening remains on track as COVID-19 vaccination rates climb. While rising inflation has become a concern, the spike in prices looks transitory so far. Ultimately, we still like the pandemic recovery trade that favors equities over bonds, the value factor over the growth factor and non-U.S. stocks over U.S. stocks.

Key market themes

With mid-June vaccination rates close to 50% in the United States and Europe, over 60% in the United Kingdom and beginning to finally accelerate in Japan, we believe the economic reopening should continue across the major developed economies through the second half of 2021. Amid this backdrop, the focus for markets has shifted to the strength of the growth rebound, the implications for inflation and the timing of central-bank moves to taper asset purchases and eventually raise interest rates.

Our view is that the inflation spike is mostly transitory, a combination of base effects—from when the U.S. consumer price index fell during the initial lockdown last year—and temporary supply bottlenecks. We believe that market expectations for the U.S. Federal Reserve (the Fed) to begin hiking rates in 2022 are premature. We expect the Fed to commence tapering in 2022, with the second half of 2023 the likely timing for the first interest-rate hike.

Our cycle, value and sentiment (CVS) investment decision-making process leads us to conclude that global equities remain expensive, with the very expensive U.S. market offsetting better value elsewhere. We see sentiment as close to overbought, but not near dangerous levels of euphoria. The business cycle is still in the early recovery stages following the lockdown-induced recession, with the strong cycle giving us a preference for equities over bonds for at least the next 12 months—despite expensive valuations. This also reinforces our preference for the value equity factor over the growth factor and for non-U.S. equities to outperform the U.S. market.