Summary

  • In the US, passage of a $1.9T stimulus package should provide a bottom up growth boost, and vaccine deployment has boosted optimism around a full economic reopening. The rapid growth recovery and government intervention have limited large scale economic damage in developed economies. We expect 6.0+% global GDP growth in 2021, the strongest in decades.
  • We advocate remaining overweight equities despite higher than average valuations. The recovery in US earnings has exceeded expectations and future earnings growth should offset a modest decline in valuations. Corporate tax rate increases would hurt earnings, but this would likely take effect in 2022. Value oriented sectors with the strongest near term earnings growth will likely outperform.
  • In international equities, we prefer emerging markets (EM) to developed markets (DM) due to higher expected growth in China, vaccine rollout issues in Europe and a very weak recovery in Japan. We believe EM Asia is the most attractive EM region longer term. USD strength was a headwind for international equities in Q1.
  • Investment grade bonds remain unattractive relative to equities due to low absolute yields. Below investment grade bond spreads and yields are also quite low and do not offer attractive returns relative to equities. We advocate maintaining an allocation to fixed income for liquidity and a risk offset.
  • Inflation is a concern and long term interest rates may move higher, but a sudden policy shift is the biggest risk to equity markets. There may be unintended consequences from recent fiscal policy packages, and these may cause central banks to remove accommodation or increase rates sooner than expected.

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