Global CIO video: "Equities still stand out for their risk premia"
Even though the major equity indices remain near record highs given the continuing economic recovery and strong earnings, we did witness brief spikes in volatility in recent weeks, as expected.
The spread of the Delta variant has been one area of concern for investors given its potential impact on economic activity. Additionally, Chinese authorities stepped up their crackdown on key industries, with restrictions on the education sector in particular leading to sharp declines in local markets that briefly reverberated globally.
The economic backdrop and potential market risks were high on the agenda of our latest Investment Committee meeting. All things considered, we expect the economic recovery in the major Western economies to continue, with progress in terms of COVID-19 vaccinations likely to keep rising infections in check.
This positive growth backdrop and strong earnings ahead should continue to underpin equities, in our view, and we continue to consider the asset class attractive. Equities still stand out for their risk premia while real interest rates remain negative. However, our tactical indicators still suggest a degree of caution, which is why we tactically keep allocations to the asset class close to strategic levels in portfolios.
Yet, we reiterate our preference or markets and sectors that should benefit from the economic recovery and ongoing stimulus. Indeed, the macro backdrop remains benign, the policy support — both fiscal and monetary — remains firm and ample, while corporate earnings are flying high. We also retain a cyclical tilt through our continued underweight allocation to global government bonds, which we believe remain unattractive.