SUMMARY
In a post-COVID setting there is likely to be a moderation in global economic growth. However, we expect growth to endure, with EPS growth rates likely averaging 7% to 8% over the next two years.
Investment strategy
October 24, 2021
Expect global growth to endure
October 24, 2021
- The period of COVID disruptions and stimulus will give way to a “new normal,” with global GDP gains ongoing, but decelerating. We expect supply shortages to diminish as consumer goods spending moderates. We expect COVID to abate as well, with new social practices, vaccines and treatments making it manageable.
- Ironically, the 28% price rise for global equities over the past 12 months is a source of risk for today’s now wealthier investor. With modest upward pressure in yields, diminished Fed bond purchases, slowing inflation and sustained economic growth, we think investors need to change expectations and portfolios.
- Global equities, with dividends and price appreciation, should generate mid to high single digits returns for coming year. But for bond investors, the yield environment points to another year of negative real returns for global bondholders, but less negative than in 2021.
- Global growth will likely exceed 5.5% in 2021 and fall below 4.0% in 2022. This will “feel much slower” after the unusually large 45% surge in US and global corporate profits in 2021. This deceleration assumes a broadening services expansion and a strong near-term outlook for goods production and trade driven by inventory rebuilding.
- China’s deliberate “multi-policy” tightening should yield its slowest growth rate in modern history aside from the initial COVID shock. However, some temporary elements of the Chinese slowdown – such as energy supply constraints – should see relief.
- China’s slowdown to sub-4% growth near-term will spill over to other world regions. As a result, we have reduced our global equity weighting from 8% to 6% overweight, with cuts to Asia, Europe and some scaling back in the US.
- Though we have reduced our global equity overweights, we have retained our modest equity overweight in China. This may sound odd since China is one of the key sources of potential cyclical weakness in the coming couple of quarters. The reason we’re staying positive on China is that its growth might be rising in 2022, while others slow. And its policy might be easing in 2022, while others tighten. That’s a source of diversification, the only “free lunch” in the business of asset management. See our Special CIO Bulletin Update on China herein.
- With US bond markets now pricing in 4-5 rate hikes by the end of 2023, intermediate duration US fixed income valuations have improved. We have raised our allocation to intermediate Treasuries, investment grade US corporate debt and municipal bonds for US-taxed investors by 2%, leaving the fixed income and cash allocation at 6% underweight.
- Last year’s energy bust has given way to boom, a common pattern for oil. Slower economic growth, the passing of “crisis pricing” in liquid natural gas and recovering oil production point to moderating prices in 2022. With energy costs now accounting for the largest share of the inflation spike, we see US CPI gains moderating to 3.0% in 2022 after a 4.5% rise in 2021.
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