House Views - September 2021 - Monetary policies to reach the peak
With global equities up c. +21% in EUR terms, the story of the year continues to be the stock market. Policy – for now – continues to be exceptionally supportive. The US Federal Reserve (Fed), the Bank of England (BoE), the European Central Bank (ECB) and the Bank of Japan (BoJ) continue to collectively pump hundreds of billions of dollars of liquidity into the financial system every month. This has cut
short every equity market wobble thus far in 2021.
In addition, genuine economic growth momentum has been helped on more recently by pent-up consumer spending. The US job
market has continued to improve. In Europe, activity indicators remain buoyant, particularly in the service sector where growth exceeded that of manufacturing for the first time since the pandemic. This is all underpinned by rising vaccination rates that have allowed the reduction of mobility and socialization constraints. This is translating into earnings, with US and European companies having reported second quarter earnings growth well above expectations.
However, the bond market has been telling a different story, with the winter sell-off (implying investors are bullish on risk assets) having moderated into the spring, before partially reversing over the summer (implying bearishness). Ten-year US government bonds saw a peak above 1.7%, but now trade closer to 1.3%; UK gilts hit a high near 0.9% but are now yielding 0.6%; German bunds came as high as -0.1%, but have slumped closer to -0.4% now. This tells a darker tale of peak growth, peak profit, peak policy. This concept of “peak” is worth visiting. Effectively, it means that the rates of economic growth, earnings growth and policy support –
monetary in particularly – has hit a high point and will now start to decelerate, which is supposedly undesirable. We do not deny that we have reached peak growth purely from a “rate of acceleration” perspective. The IMF expects global growth in 2021 to be 6% with advanced economies growing about 5%. According to their forecast this will slow next year to 4.4% and 3.6%, respectively. However, this year’s stellar figures are a result of a base effect, as they follow a massive global and advanced economy contraction last year of - 3.3% and -4.7%, respectively. Next year’s growth, which builds on the gains of this year, is understandably slower, but it is reflective of an economy which is getting ever larger.
Ultimately, growth is good, even if it is slower. This should be further positive for equity markets, notably European ones, and should negatively affect bond markets. But for this effect to ultimately translate to financial market, the key factor will be the adjustment of monetary policies to this peak of growth, with major central banks that will have to adjust progressively their liquidity injections.
We believe the case for risk-taking is well supported given a strengthening economic backdrop and strong momentum. Therefore, our portfolios are risk-on. Nonetheless, we continue to hold a stable of safe-haven assets to offset risks, particularly those from equities – which are expensive and supported somewhat by heady sentiment. These include gold and defensive alternatives (e.g. low-volatility hedge funds)
In accordance with the applicable regulation, we inform the reader that this material is qualified as a marketing document. CA25/H1/21 Unless otherwise specified, all figures in this report were taken from the following sources on 06/09/2021: Bloomberg and Datastream.