Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
‘Growing pains’ to hamper growth recovery
Russell Investments has released its Q4 Global Market outlook research note, titled “Growing Pains.” It is appropriately titled, with the research team seeing a confluence of factors over-hanging the market placing negative pressure on investor confidence. These factors include the Delta variant, inflation and central bank tapering.
While the post-Covid recovery is expected to resume, albeit at a slower pace, the investment house is worried about monetary policy and rising inflation. Russell says: “Inflation may remain high over the remainder of 2021 but should decline in early 2022. This means that even though the US Federal Reserve is likely to begin tapering-back on asset purchases before the end of the year, rate hikes are unlikely before the second half of 2023.”
The other concern is the highly virulent Covid-19 Delta strain. The vaccines are effective in preventing serious infection and death but don’t stop the spread of the virus. Vaccine rates are accelerating: Australia along with rest of the world should hit the 80 per cent mark over the remainder of 2021. This means the reopening of economies should continue over the remainder of 2021.
But there is light at the end of the tunnel. Russell Investments is confident the re-opening trade is still on. It will see rising long-term interest rates and cyclical and value stocks being more appealing over technology and growth stocks. This trade has taken a sidestep in recent months, due to Delta, as we all know. Rest assured, fears of a derailing of the economy are overstated.
Russell says: “The re-opening trade should resume in the coming months. The cyclical stocks that comprise the value factor are reporting stronger earnings upgrades than technology-heavy growth stocks, and the value factor is cheap compared to the growth factor. Financial stocks comprise the largest sector in the MSCI World Value Index, and they should benefit from further yield-curve steepening, which boosts the profitability of banks. Long-term interest rates should rise as global growth remains above trend, delta-variant fears fade, the short squeeze unwinds and central banks begin tapering back on bond purchases.”
As growth moves away from the US and to the rest of the world, emerging markets will start to come into focus. Despite being poor performers since the vaccine announcement, there are some encouraging signs. “The vaccine rollout across emerging markets has accelerated and policy easing in China should soon improve the growth outlook,” says Russell. “The path of Chinese regulation is harder to predict, but it is now largely priced-in, with Chinese technology companies under-performing their global peers by nearly 50% from February 2021 through mid-September.”
In summary, Russell Investments agrees that “global equities remain expensive, with the very expensive US market offsetting better value elsewhere. Sentiment is slightly overbought, but is not close to dangerous levels of euphoria.” The preference is for equities over bonds for the next year despite it being on the expensive side. Russell Investments prefers the value equity factor over the growth factor, and for non-US equities to outperform the US market.
