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The not-so-great rotation – Q1 2021 equity outlook

Outlooks & Research

Daniel MORRIS
 

In this new quarterly publication, Daniel Morris, our chief market strategist, looks ahead to assess the prospects for global equity markets.

As the year gets underway, equity investors, quite rightly, remain resolutely focused on the positive, medium-term outlook for corporate profits rather than the near-term challenges.

With economies globally in a synchronised recovery, higher earnings seem almost assured; the concern is rather whether the currently expected level turns out to be too optimistic and the market multiple placed on those earnings unsustainably high.

In our view, the economic recovery and rebound in inflation will drive a rotation into value and small-cap stocks. While this should allow value to recover some of its underperformance of recent years, we nonetheless expect quality/growth to retain its dominance.

In 2020, investor sentiment swung from excessive despair to enthused optimism. As a result, valuations for some sectors and markets leave little margin for error. While this will likely limit returns this year, we would look to any pullbacks as an opportunity to add risk.

In our opinion, the recovery from the coronavirus lockdowns has further to run. Further fiscal stimulus, low real yields, and an eventual return of economic activity to pre-pandemic levels promise more upside for equities.

We favour those markets and sectors that should benefit from reflation:

  • value
  • cyclicals
  • small caps
  • US and emerging market equities.

Read our latest quarterly equity outlook

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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