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Investment strategy
September 12, 2021
2 mins

Capturing market upside in the age of COVID

September 12, 2021
2 mins
David Bailin
Chief Investment Officer and Global Head of Investments
Steven Wieting
Chief Investment Strategist & Chief Economist
SUMMARY

Despite positive earnings news, equity market investors remain worried as the tailwinds of stimulus start fading. But we disagree with conjecture that current broad equity valuations are troubling and still expect gains, albeit at a slower pace with higher volatility.

  • Record high share prices have been “legitimized” by record high profits. The huge corporate profit gains of the past few quarters were critical in sustaining this equity market rally.
  • Present global equity valuations – unlike the late 1990s period – are very different from US valuations. Non-US equities trade at a 25% valuation discount to the US overall. US “value” shares also trade at a similar discount. Both measures are close to their long-term average valuation. Only Tech shares are expensive but have much higher sustainable growth rates.
  • We are far from an economic peak. Absolute EPS gains averaging 7% to 8% in the next 2 years are consistent with positive equity returns. Expect further new records highs ahead, but with gains made at a slower pace with higher levels of volatility.
  • During periods like this - where earnings growth is strong, but slowing - intra-year corrections become more prevalent. They also tend to be shallow. Market timing is a very bad idea during such periods. Corrections are typically short and subsequent returns tend to outweigh the “anxiety” of volatility.
  • Strategies to improve the quality of portfolio assets, focus on the total return from equities including dividends and diversify portfolios to specific emerging markets and to specific segments, are all ideal for this environment. Such a strategy may reduce portfolio drawdowns if and when they do occur, while capturing much if not all of the upside as the economic expansion continues.
CIO Strategy Bulletin

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Market recovery should offset decline in policy stimulus
Steven Wieting
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Despite supportive announcements, we expect monetary policy stimulus to gradually diminish post-COVID. Hence, we have shifted our allocations within equity markets away from the riskiest firms to those with strong long-term prospects predicated on a wider economic rebound.
Learn moreabout Market recovery should offset decline in policy stimulus
‘Powell Play’: Investment implications of Fed’s policy
David Bailin - Steven Wieting
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Fed Chair Jerome Powell’s recent speech focused on achieving maximum employment while downplaying inflation risk. An everything rally followed in its wake, but we believe such inclusive rallies will be increasingly rare deeper into a market recovery.
Learn moreabout ‘Powell Play’: Investment implications of Fed’s policy
Fed hints at monetary stimulus wind-down sooner rather than later
Bruce Harris - Steven Wieting
August 27, 2021
The Fed’s recently revealed stance was dovish, but only by a few months, as it likely pushed the formal taper announcement from September to November as the US central bank awaits more data.
Learn moreabout Fed hints at monetary stimulus wind-down sooner rather than later
Reviewing US, UK and China versus rising COVID prevalence
David Bailin - Steven Wieting
August 22, 2021
The rise of Covid and regulatory actions are impacting markets, but we think some concerns are overstated while others are underappreciated. We offer recommendations and delineate trends likely to impact key markets here.
Learn moreabout Reviewing US, UK and China versus rising COVID prevalence

Insights

See our insights and the issues that matter for your wealth. 

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