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Assessing the Economic Revival

Corporate earnings and GDP growth are surging but will the Delta variant and rising inflation dampen the recovery?

Economic Growth to Remain Robust
Vaccines and Variants
Keeping Inflation in Check
Stay the Course

Asset Class Detail

Global Equity

  1. U.S. Large Cap

    U.S. Large Cap U.S.
    large caps are still overvalued but given current interest rates, they remain reasonable. A diversified portfolio of growth and value stocks is prudent given continued market uncertainty, but investors may tilt toward value with economic growth and rising rates expected to continue.

    Long/Short Equity
    Long/short strategies have faced challenges in 2021 given the dominating movements of factors, particularly growth which has been negative. Managers have been holding their exposure levels and adding to high conviction positions through this choppy environment but are looking for fundamentals to drive stock performance.

    Current View: Slightly Positive

  2. U.S. Small Cap

    Valuations remain extended but off their highs after strong earnings growth and a pause in cyclical outperformance. Small caps should perform well if economic momentum is sustained but may be prone to bouts of volatility if the Delta variant causes any economic disruption.

    Current View: Slightly Positive

  3. Non-U.S. Developed

    International equities posted positive returns but continued to lag U.S. stocks. However, superior vaccination rates, strong economic momentum and more attractive valuations relative to domestic stocks makes for an attractive backdrop. Be wary of downside risks: Covid-19 variants and stalled vaccination efforts. Europe may be better positioned for outperformance than Japan, where growth is more modest.

    Current View: Slightly Positive

  4. Emerging Markets

    Valuations remain reasonable relative to developed markets and their own history. Concerns around slowing growth and increased regulation in China have weighed on the index this year, but growth prospects for many of the other emerging economies remain bright, especially as vaccine distribution continues to improve. The cyclical nature of many emerging markets should be beneficial as global growth recovers.

    Current View: Slightly Positive

Global Debt

  1. Core Bond

    Treasury yields remained lower for most of the quarter before rising sharply in September on inflation and Fed tapering concerns. We expect rates to continue to move higher over the intermediate-term as the Fed gradually turns more hawkish and strong economic growth pushes the long end of the curve higher. Conservative investors should maintain an allocation to core bonds to lower portfolio volatility but investors requiring current income above inflation could supplement with investment-grade bonds, high-yield bonds or dividend-paying stocks.

    Current View: Slightly Negative

  2. Investment Grade

    Investment-grade spreads remain very tight and yields remain low relative to history. Although corporate fundamentals have improved significantly, tight credit spreads leave little room for appreciation and rising interest rates will make for a challenging environment.

    Current View: Slightly Negative

  3. High Yield

    Spreads remain tight relative to historical averages. However, fundamentals continue to improve and default rates are low. High yield provides much more attractive yields and carries less duration risk than investment-grade bonds, though effective active management continues to be important.

    Current View: Neutral

  4. Non-U.S. Developed

    Interest rates overseas are modestly higher year-to-date, but non-U.S. sovereign debt continues to provide unattractive yields relative to U.S. Treasuries. Most central banks overseas are expected to remain extremely accommodative. Corporate bonds in Europe and Japan provide lower yields than their U.S. counterpart, though fundamentals are improving with a strengthening economy.

    Current View: Slightly Negative

  5. Emerging Markets

    Emerging-market debt—government and corporate—offers much higher absolute yields relative to the rest of the world. Improved vaccine distribution and less cases could also be a strong catalyst for emerging markets. Investors may prefer local currency denominated debt to hedge U.S. dollar exposure.

    Current View: Slightly Positive

Diversifying Strategies

  1. Real Assets

    Real assets offer attractive yields relative to broader equity markets. REITs have performed strongly in the face of rising inflation and valuations remain reasonable relative to the broader market. MLPs offer attractive yields at modest valuations and possess more upside potential as continued economic strength should put a floor under oil prices. Infrastructure has performed well in inflationary periods and could rally with the passage of further spending.

    Current View: Positive 

  2. Macro

    Fundamentally driven strategies performed relatively well in 2020 but have seen rising outflows in 2021. Timing global central bank policy decisions will be challenging as the outlook is uncertain and economic data is mixed. Macro strategies may be a source of return in 2022 as central banks’ view toward more hawkish policy is clearer and opportunities to take advantage of disparities between regional market recoveries increase.

    Current View: Neutral

  3. Other Strategies

    Event-driven strategies continue to generate uncorrelated returns as M&A activity and deal flow remains robust, while multi-manager strategies also look attractive in their ability to diversify or rotate capital based on opportunity set. These strategies continue to act as fixed-income replacements for investors as a low interest rate environment persists in the near-term.

    Current View: Positive