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Investment strategy
September 12, 2021

Capturing market upside in the age of COVID

September 12, 2021
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 (PDF 708.06 KB)

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