(Bloomberg) – As stocks continue to break record after record around the world, some of the world’s largest wealth managers have a simple message: get used to it.
Companies like BlackRock Inc., State Street Global Markets, UBS Asset Management, and JPMorgan Asset Management expect stock markets to continue rising in the second half of the year, with many investors increasingly looking for higher returns outside of the US.
Globally, amid a sustained economic recovery, the asset class is proving too heavy to resist, even though the MSCI All-Country World Index is already 12% at an all-time high this year. While some market participants warn of the risk of a slump amid sharp valuations, the strong rebound in corporate earnings and strong central bank support should keep the rally alive.
“Vaccination is accelerating around the world, major central banks remain extremely responsive, fiscal support is still in place and profits continue to rebound,” said Esty Dwek, director of global market strategy at Natixis Investment Managers. “In such an environment, a very negative scenario for stocks is difficult to imagine.”
There are, of course, many pitfalls. Here’s a look at some of the factors that keep investors tied to stocks despite the risks:
No place like stocks
Part of the reason for the equity rally is that there is still nothing as attractive as stocks, as developed country government bond yields remain lackluster and credit spreads have fallen to their lowest levels in over a decade.
This has a lot of catching up to do now that the economies are reopening after the lockdowns last year. The strategists at Goldman Sachs Group Inc. recently pointed out that US money market funds surged to a record $ 5.5 trillion during the pandemic, showing that a lot of cash is on the verge.
“Many indicators suggest that the home-seeking system still has overwhelming liquidity,” said Carsten Roemheld, capital markets strategist at Fidelity International.
With strong support from global central banks, capital flows will continue to flow into stocks, although return expectations should be much lower from here, added Roemheld.
Looking ahead, investors overall prefer cyclical and value stocks, which will benefit the most from a recovery in growth. In terms of regions, many professional investors said they prefer Europe, which will be boosted by its high exposure to such stocks, and Japan, whose stock market has lagged the US.
While fears that the US Federal Reserve will tighten monetary policy faster than expected have churned markets last month, investors still don’t see the central bank hike rates anytime soon, or at least not too quickly.
Overall, market participants expect central bank policies to remain accommodating to support economies emerging from the chaos of the pandemic.
“For now, monetary and fiscal policies around the world will remain loose, and the reality is that it will take time for interest rates to rise,” said Ben Lofthouse, head of global equity income at Janus Henderson Investors.
Everything about income
A rebound in earnings growth is seen by many investors as key to fueling the equity rally. Globally, earnings expectations have bounced back to pre-pandemic levels, and nearly 50% of S&P 500 companies raised their full-year outlook in the past three months, one of the highest percentages since 2010.
“An indication of better times is no longer enough and investors will want real evidence of growth or free cash flow,” said Max Anderl, portfolio manager at UBS Asset Management in London.
While the emergence of more highly transmittable variants of the virus poses a major risk, the advances made by developed countries with their vaccination programs are calming investors’ nerves.
“We continue to see success in vaccination and economic reopening as the main driving force behind improving the economic outlook, earnings outlook and ultimately equity market returns,” said Marija Veitmane, senior multi-asset strategist at State Street Global Markets.
It might be more difficult to get stock returns, however, as much of the reopening optimism is priced in. Seema Shah, chief global strategist at Principal Global Investors, said investors need to be more selective in choosing regions, sectors and styles.
“Inside stocks, cyclicals and value should continue to benefit from the likely rise in consumer spending, but investors should also consider secular growth stocks like mega-cap technology,” Shah said via email, adding that these companies will benefit are a permanent movement towards cloud computing and dependence on technology.
One could argue that the setup is just too good for stocks as economic indicators in both the euro area and the US are scorching hot. But even that is not necessarily seen as a problem.
“If you look back in the past, the peak of the leading indicators doesn’t mean the markets will fall,” said Claudia Panseri, global equity strategist at UBS Global Wealth Management, over the phone. “The market is usually pretty down when you are worried about growth and when you think there is going to be a big tightening or a big change in monetary policy. And I think that both conditions are still not there to have a big correction. “
While excessive valuations could be seen as a barrier to further gains, investors are not overly concerned. Patrik Schowitz, global multi-asset strategist at JPMorgan Asset Management, said that while stock valuations will continue to fall, it should be driven by earnings growth faster than stock prices rather than weak markets.
While investors expect global stocks to continue rising, they warned that volatility could do so. The Cboe volatility index (VIX) is at its lowest level since last year’s pandemic sell-off. In fact, the Nasdaq 100 index has hit overbought levels, causing some short-term declines over the past year.
For some market watchers like Nigel Bolton, co-chief investment officer for fundamental stocks at BlackRock, setbacks are buying opportunities.
“We’re seeing really strong earnings growth, not just for this year, not just the recovery, but into 2022 and, more slowly, into 2023,” BlackRock’s Bolton said on the phone. “So all of these factors are why you’re still looking at a bull market and we’re going to wobble along the way.”
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