Global Growth Propels Equity Markets
Investment managers are remarkably bullish about the prospects for equities. At Legal & General Investment Management, chief investment officer Sonja Laud told a recent media briefing that the theme of LGIM’s macro outlook is ‘heating up’, a reference to the global economy and the planet.
“While a lot of good news has been priced into markets, we still expect them to grind higher in the coming weeks, albeit with a fair amount of volatility along the way,” said Laud. “A key uncertainty is how the Federal Reserve interprets inflation risks as fiscal support meets a booming economy.”
The first three months of the year witnessed record inflows into equity funds. “The optimism we all feel now that kids are back in school and pubs are open translates into investor exuberance as well,” says Emiel van den Heiligenberg, head of asset allocation at Legal & General. “Then there is the vast amount of liquidity provided by governments and central banks, a wall of money that continues to support markets.”
“We remain long on risk assets, on the view that most investors are positioned to buy any meaningful market dip. We struggle to see how this attitude could change over the coming months, to make investors become sellers of dips, bar a black swan event like the pandemic or a geopolitical conflagration.”
The US Fed will eventually withdraw the punch bowl, but not for a while, according to Tim Drayson, head of economics at L&G. His expectation is that the Fed will commence tapering towards the end of the year, though it might also have to reassess the timing of lift-off for short-term interest rates. “The market is already anticipating a somewhat earlier start to rate hikes. Any sudden shift in Fed thinking has the potential to be disruptive for markets addicted to tremendous policy support,” Drayson cautions.
At Zurich Life, head of investment development Richard Temperley says markets have revised their global growth forecasts upward, buoyed by Biden administration stimulus and stronger than expected economic activity in Asia. “We stick to our constructive view on risk assets, as ample liquidity remains the driving force. We do not yet see any exuberance among investors, as setbacks in equity markets are interpreted as buying opportunities,” Temperley explains.
Sector-wise, Zurich funds are positively biased towards technology and consumer discretionary stocks and more negative about energy, healthcare, utilities and consumer staples. Financials have been increased from underweight to neutral. “There has been some rotation out of growth stocks into some cyclical or value stocks. However, the long-term trend favouring growth remains in place,” Temperley adds.
At New Ireland, chief investment strategist Kevin Quinn agrees that economic growth expectations for the recovery phase have strengthened considerably. He notes that the IMF is forecasting 6% growth globally for 2021 while the Fed is predicting 6.5% expansion for the American economy. “The key question for markets is when the Fed will begin to raise rates, as it is likely to be ahead of the ECB. The Fed doesn’t plan on raising rates any time before 2023 but the market currently thinks it will be sooner,” says Quinn.
Benefiting from the positive macro sentiment, and strong Q1 earnings results, is Zurich’s 5 Star 5 Global Fund, an actively managed fund that normally holds up to 50 global equities across five different sectors. Through Q1, this fund had a pre-charges gain of 9.9%, and after bumper outcomes in 2019 and 2020 the fund’s annualised return since launch in 2001 is currently 8.2%.
The usual suspects such as Apple, Amazon, Microsoft and Alphabet are among the fund’s largest holdings, though the most exposure is to Total, indicating that the fund managers don’t just follow the herd.