Back to school

Getting smart about the rest of the year

It’s back to school time in the Northern Hemisphere, and we have an eventful term ahead. In biology, we’ll learn whether vaccines can prevent further COVID-19 lockdowns. In politics, we’ll find out what happens when you try to pass a USD 3.5tr fiscal package with thin majorities in the House and Senate. In economics, we’ll see how slower central bank bond purchases affect bond and equity markets. In business studies, we’ll think about the implications for profit margins when both revenues and costs rise. In ecology, we’ll consider the impact of “greenflation.” And in contemporary history, we’ll be looking at Germany and Japan, with new leaders set to take over.

In last month’s letter, “The return from orbit,” I presented our view that economic growth will remain high for the coming quarters—supported by rising household incomes, retailers’ restocking, and a recovering labor market—but that the path by which we return to more normal levels will define the investment outlook. In this letter, I highlight some of the big questions that should be answered before the end of the year, and our view on how they can impact our portfolios.

In short, while localized setbacks in combating COVID-19 have the potential to slow the rebound in individual economies, we continue to see broad progress in curbing the pandemic and do not expect renewed lockdowns in highly vaccinated countries. Higher funding rates, higher input costs, and higher US corporate tax rates also pose potential risks, but should not preclude continued upside for global stocks while economic growth remains strong.

Tactically, we are positive on equities, tilted toward cyclicals—the winners from global growth. Regionally, we see the most potential near-term upside in Japan, which has begun to stand out on expectations of fresh fiscal stimulus. At a sector level, we like energy, financials, and healthcare as well as US mid-caps. Fixed income opportunities are more limited, with spreads tight, yields low, and tapering ahead. However, we like floating-rate US senior loans, Asia high yield, and opportunities for earning “unconventional” yield through strategies like volatility-selling.

For longer-term investors, the transition to net-zero carbon remains a key theme. The squeeze higher in natural gas and coal prices this month, partly resulting from attempts to meet emissions goals, demonstrates the continued need for investment in renewable energy capacity and green technology. We also see long-term opportunity in themes including automation and robotics, cybersecurity, and healthcare. For more on our outlook for the remainder of the year and key longer-term ideas, see our 4Q outlook report, “Navigating record highs.”

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