Global indicators continue to signal a sharp business recovery from last year’s COVID-19 pandemic lows. While inflation expectations are increasing as a result, business improvements offer multi-asset investors good reasons to remain tilted to equities for the next stage of the recovery.
Vaccine rollouts and new or extended lockdowns, where needed, seem to be further containing the virus, although some countries continue to struggle. New cases overall are trending downward, which should lead to more reopenings and further economic gains in many regions.
While the strength of consumer spending is likely to be a driving force for growth this year, so too will be the increased spending from businesses. Pent-up demand due to severely depleted inventories last year (Display left, above) and major year-over-year boosts in projected spending (Display right, above) are rapidly generating strong business activity around the world. And these trends are supporting improved revenue growth outlooks for many companies, especially manufacturers.
Of course, rising business activity may also fuel a short-term pickup in inflation (reflation). However, since inflation is starting from a historically low and stable level, we don’t see it as a major risk. In fact, our analysis shows that inflationary regimes that begin from below the 2% target rate have historically been a boon to equities and real assets over time. And key positive return signals of company quality, strong balance sheets and growth potential offset negative indicators like inflation, rising yields and stretched valuations, in our view. In this environment, we think multi-asset investors should consider a modest overweight to equities, while leaning into real assets, which should also do well if inflation is reawakened as the economic picture improves. With a selective approach, investors can avoid market segments and companies that are still vulnerable to COVID-19-related fallout while benefiting from the most promising recovery-driven potential across asset classes.
- Karen Watkin
- Portfolio Manager—Multi-Asset Solutions