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Investment strategy
March 1, 2021
3 mins

A turning point and a reckoning: The markets adjust to the end of the pandemic

March 1, 2021
3 mins
David Bailin
Chief Investment Officer
Steven Wieting
Aerial view of Arpoador in Rio de Janeiro

Amid the recent rise in bond yields, equities have suffered volatility. However, we do not believe the end of the equity bull market is nigh, and we continue to identify opportunities such as Brazil.

Critical observations:

  • The rapid change in the bond markets perception of accelerating growth will continue to roil stock markets. We expect further volatility and even a normal correction near term.
  • Growth and inflation expectations have risen markedly in a very short time. Fears of inflation have been stoked by the fact that the Federal Reserve Bank does not seem worried enough about inflation that might ensue in a rapid economic recovery. With nearly 10 million US jobs lost during the pandemic, income and output can potentially be so much higher during several years of recovery before the economy is overly stretched.
  • Our view is that rising yields do not portend the end of the bull market in equities. We fully expect that EPS growth in 2021 and 2022 will offset higher and more normal levels of interest rates. While there can be parts of the economy that see price increases (housing, certain commodity-exposed products, and in time some services like airline flights) underlying inflation is likely to remain within normal ranges.
  • The correction in high growth and highly valued companies does present an interesting opportunity within our Unstoppable Trends. We believe investments exposed to themes like increasing health care spending, 5G & Hyper-Connectivity, Asian consumption growth, and the transition to renewables should represent core allocations in portfolios. Selloff dislocations will present opportunities to buy long-term growth engines at 10-30% cheaper than they were just a few weeks ago as their future earnings prospects are un-diminished.
  • We have been overweight Latam, and specifically Brazil, since mid-2020, due to global reflation expectations, the highly pro-cyclical nature of the regional economies and the post-Covid normalization that we expect to begin in 2H21. Firm commodity prices, historically competitive real effective exchange rates, more fiscal stimulus and earnings recovery should provide further upside from a low starting base. The most recent sell off in Brazilian markets makes our tactical play even more compelling in our view.
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