Beyond the pandemic: a sunny outlook

The growth prospects for the coming quarters look promising. Vaccinations, the lifting of lockdown measures and ongoing fiscal and monetary stimulus programmes should provide a further boost to economic growth. The biggest risk remains a failed vaccine rollout or a marked rise in inflation, but neither has significant weighting in our main scenario. Both governments and pharmaceutical companies will do their utmost to bring the vaccination campaign to a successful conclusion, while central banks will keep their extremely accommodative policies. We are maintaining a slight overweight in equities and continue to prefer corporate bonds versus overpriced government bonds.

The growth outlook for the coming quarters looks promising. Vaccinations, the lifting of lockdown measures and the ongoing fiscal and monetary stimulus, coupled with the fact that consumers have been setting aside a lot of cash and will be keen to spend a (large) portion of this as soon as possible, should pave the way for rapid economic expansion. Our economists are constantly revising their GDP growth forecasts upwards. Inflation, which had been declared moribund, also looks set to soar in the coming quarters, with services in particular in far greater demand, even though their supply has barely increased and even contracted during the coronavirus crisis. In addition, commodity prices have climbed sharply in recent quarters, which will increasingly be reflected in inflation figures. Numerous supply chains have been interrupted, causing bottlenecks for microchips and in sea container transport along the Asia-Europe and Asia-US routes. One such bottleneck was exacerbated recently by the temporary blockage of the Suez Canal.

These expectations have already been priced in to a significant degree; share prices and commodity prices have risen rapidly, as have inflation expectations and, to a lesser extent, long-term interest rates. Concerns about higher interest rates over the long term have been growing in recent weeks, but so far this has only led to a rotation from technology stocks into cyclical equities and bank stocks that benefit from such interest rate trends. In order to align our portfolios to the various possible scenarios, we are currently examining the following questions: What can we say in the longer term about growth and inflation expectations? Will rising long-term interest rates continue to pose a problem for equities? How will central banks respond?

In our main scenario, our economists expect strong global growth over the next two years. They see the US and the emerging markets as the main driver of growth, while Europe appears to be lagging once more. This will be followed a slight slowdown in global growth, albeit at a pace that is still faster than the past 10-15 years. Governments and central banks will do everything they can to maintain the momentum they have created with their expansionary monetary and fiscal policies. Central banks are currently confirming that they will not raise interest rates in the years ahead, and as long as market participants have confidence in these statements, real assets such as equities and commodities should continue to trend higher. We expect a temporary uptick in inflation in the coming quarters, which could spark fears of a structural rise. Nevertheless, we anticipate that other, highly deflationary forces will persist, which should prevent inflation from increasing substantially in the medium-to-long term. The next few quarters could be characterised by increased volatility, however.
Moderate inflation combined with healthy global growth will continue to support valuations of real assets, meaning that we will retain our overweight in equity investments. We also continue to favour corporate bonds over overvalued government bonds.

Giovanni Leonardo 

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