QUARTERLY INVESTMENT OUTLOOK: JULY 2021
/At this juncture we would welcome a correction in risk assets i.e., equities, commodities, bitcoin etc. Momentum and sentiment are stretched. Risk assets need a reset in order to pave the way for a continuing cyclical advance in prices, which is our base case looking out twelve months.
Equity valuations are also extended. Stock prices are far ahead of corporate earnings trends. A digestion phase would be beneficial. The cyclical advance in bond yields has raised investment risk! A slowdown in real growth (ISM manufacturing) could flatten bond yields over the intermediate term.
Corporate bond spreads, both Baa and Junk, are trading near historic lows. Tight corporate spreads vis a vis treasuries are supportive of risk assets. Our macro strategists MRB Partners caution investors not to become too complacent regarding low corporate yields. As treasury yields gradually trend higher this is bound to exert upward pressure on corporate yields, having a potentially negative effect on equity valuations. On a positive note, this is unlikely to happen until central banks finally shift gears.
We expect both real growth and real yields to remain low in the post-pandemic period. Inflation should gradually trend higher with both fiscal and monetary policies remaining accommodative. Our inflation barometer is trending higher. Avoid intermediate/longer dated Government bonds.
Gradually increase exposure to global ex-U.S. equities. Foreign markets offer better value and should benefit from dollar weakness.
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