Talking Tactics

Four challenges for multi-asset investors for H2 2021

Paul Niven talks through four challenges for multi-asset investors and explains how they can navigate them in their portfolios.
June 2021
Share

The past 18 months have been a wild ride for investors, with global equities reaching all-time highs in early 2020 before sharp declines amidst some of the highest levels of volatility ever seen.

Last year’s market moves in February and March briefly erased around one-third off the value of global equities, as investors factored in the extent of the damage being wreaked on the global economy through lockdown measures. Despite the scale of these downward moves, markets bounced back quickly and were predominantly back to pre-pandemic levels by the fourth quarter last year; yet despite the continuing easing of restrictions in many countries as we move through 2021, there remain challenges for multi-asset investors.

Risk Disclaimer

Views and opinions expressed by individual authors do not necessarily represent those of BMO Global Asset Management.

The value of investments can go down as well as up and investors may not get back the original amount invested.

1. The recovery: economic growth and earnings strength

More than a year on from the start of the pandemic, the economic recovery is now well and truly underway. Growth forecasts are strong, and continue to be revised higher. Indeed, we may see growth exceeding 7% in the US in 2021 compared to the -3.5% contraction in 2020, while growth in the UK may well exceed 6%. Purchasing Managers’ Index (PMI) surveys, a gauge of economic activity, have registered strong gains in 2021 for the US, UK and Eurozone. In the UK, the Services PMI has enjoyed a notable boost in recent months, from 39.5 in January 2021 to 62.9 in May, as Covid-related restrictions were eased, and retail and hospitality venues reopened. Importantly, savings rates remain comparatively high in both the US (14.9% for April 2021 versus 8.3% for February 2020) and UK (16.1% for December 2021 vs 7.7% for December 2020), suggesting significant levels of pent-up consumer demand. All this positive economic data is reflected in broad optimism from markets, and forecasts for S&P earnings remain upbeat with the earnings recovery expected to continue into 2022. But how long can companies continue to beat expectations and is this optimism overdone?

2. The virus: vaccines and variants

Clearly, the rapid development and rollout of Covid-19 vaccines has been critical to the economic recovery. Developed market countries are performing well, notably the US and UK, with the latter having fully vaccinated over 50% of its adult population. Previous vaccine rollout laggards Canada and the EU have stepped up their efforts and are gradually catching up; however, a lack of vaccine availability has meant that many emerging market countries are now far behind. Despite the progress made, new variants of the virus, which have the potential to reduce the efficacy or even evade vaccines, remain a threat to the relaxing of restrictions and the continuation of the economic recovery. Should multi-asset investors be factoring in a potential setback in the easing of restrictions from recurring new variants, and waiting until the emerging world has made more vaccine progress before putting more risk on the table?

“Despite the progress made, new variants of the virus, which have the potential to reduce the efficacy or even evade vaccines, remain a threat to the relaxing of restrictions and the continuation of the economic recovery.”

3. Financial support: relief packages and rates

The levels of government stimulus and the support from central banks in response to the pandemic remains unprecedented. For example, in the US, Covid-related relief and stimulus bills totalling at least $5 trillion have been signed into law. Not only have central banks cut rates to near zero levels, but they have also implemented vast asset purchase programmes in terms of both scale and breadth. The stimulus is likely to have long lasting effects, and we expect that real yields will remain low, indeed negative, for some time to come. Despite the positive economic momentum that we have seen in recent months, central banks generally see rates on hold for several more years, suggesting easy financial conditions are here to stay for the foreseeable future. This is to be expected as low rates make it much more affordable for governments to payback the considerable debt they have accumulated to keep their economies and workforces afloat. But as the economic data continues to post positive numbers, governments will begin to wind down the relief packages for the working populations. Could this mean that the boost from pent-up demand is short-lived, or even reversed, and what does this mean for consumer spending in the second half of the year?

4. Inflation: consumer spending and commodity boom

Inflation is a key concern, with a short-term surge in US indicators leading to worries of longer lasting pressures. The upcoming surge in demand brought on by a relaxation of restrictions and drawdown of significant consumer savings is leading to a stronger economic growth backdrop. This, coupled with base effects from the low readings of 2020, suggest that inflation worries look set to increase in the near term. In addition, commodity prices have also surged, with the key industrial metal, copper, reaching a new high in May 2021. While short-term bottlenecks in production are also currently playing a role, there is much debate among market participants over the nature of the higher inflation that we are currently seeing – in terms of whether it is transitory or more sustained. Should multi-asset investors be adjusting their portfolios for potentially higher longer-term inflation?

What does this all mean for multi-asset portfolios?

With so many competing factors the outlook, as always, remains uncertain. Nonetheless, a brisk economic recovery along with supportive policy and low interest rates is positive for equity markets. Higher inflation is a risk for investors, and while we by no means expect a return to the level of inflation seen in the 1970s, a tilt to slightly higher inflation in the shorter term seems likely; however, in our view, it is unlikely to materially undermine the attraction of equity markets. Stronger growth and a gentle uptick in inflation, combined with current valuations within equity markets, has led to a broadening in performance within equities, beyond the narrow set of disruptive leaders and ‘lockdown winners’. These types of divergent markets are well suited to active managers who are able to move out of companies that may have already enjoyed the benefits from their lockdown boost, and into businesses that have sustainable competitive advantages to weather any short-term shocks.

Paul Niven

Managing Director, Portfolio Manager and Head of Portfolio Management, Multi Asset Solutions

LEARN MORE ABOUT THE AUTHOR

Risk Disclaimer

Views and opinions expressed by individual authors do not necessarily represent those of BMO Global Asset Management.

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Subscribe to our insights

Webinar

Register for access to our webinars and receive notifications of upcoming webinar events. 

You might be interested in...

No posts matching your criteria

Why BMO for low-cost multi-asset

BMO Universal MAP redefines value through active multi-asset solutions and business support at a passive price point. Fund OCFs at 0.29%-0.39%.

Our Portfolio

The BMO Universal MAP and Sustainable MAP ranges offer risk-controlled portfolio options designed to cover a host of client growth, income and sustainability needs.

Sign-up for Multi-Asset insights from BMO

Contact Us

Want to know more about BMO and our Universal
MAP and Sustainable MAP products and services?