Risks To Our Outlook
Concerns about vaccine efficacy, especially with the spread of the Delta variant, is a risk for the equity market as challenges further impede the path to economic normalization and reopening.
In addition, while the equity market has a tendency to look past geopolitical tensions, the situation in Afghanistan could alter the course for further fiscal stimulus, which continues to be a part of the positive narrative for the stock market.
Outside of the U.S., concerns about slower growth in China are being debated as the rules for the internet sector and new data privacy laws continue as part of the regulatory crackdown.
We reiterate that equity markets are susceptible to pullbacks, such as last week, and may react negatively to economic data that misses consensus expectations.
Despite these challenges, we think that global equity markets will again prove how resilient they are as underlying fundamentals remain strong.
Best Ideas
Discounted valuations present opportunities in developed non-U.S. markets, particularly in Europe, which is experiencing higher Covid-19 vaccine uptake. We expect stronger relative earnings growth to be a catalyst for select stocks in cyclically oriented sectors. We still remain bullish on emerging markets, specifically Brazil, which offers opportunities tied to growth in innovative fintech and e-commerce stocks. In the U.S., continued strong earnings and expectations for higher yields in the next several months should lead to outperformance for cyclical sectors and small caps.
In Focus: Oil Supply And Demand Balance May Be Near
The global energy sector is at a crossroads amid shifting oil supply and demand dynamics and investor uncertainty about the impact of the Delta variant on mobility and fuel use.
In terms of supply, OPEC+ will seek to reverse cutbacks made last spring, ramping up monthly production by 400,000 barrels per day beginning in September and extending through Q3 of next year.
Demand estimates, meanwhile, are subject to negative revisions due to several factors: a drop in the number of flights in China, Covid-19 lockdowns across Asia, slower-than-anticipated global vaccine uptake and fewer U.S. air travel passengers.
The divergent trends of increasing supply and slower demand recovery could bring a quicker rebalance to the oil market, casting doubt on recent forecasts showing crude prices in the $80-$100 per barrel range.
Although OPEC+ producers may pause adding barrels in early 2022 given the risk of material oversupply, they are likely still keen to bring their spare capacity back online ahead of any potential resurgence in U.S. shale activity.
The investment implications are for another year of limited U.S. oil supply growth and a focus on balance sheet repair and disciplined capital allocation. We see an emphasis on dividends and share repurchases. Investors eagerly awaiting the next upcycle for energy equities should look to the second half of 2022 as global spare capacity is reduced and demand normalizes.
Saira Malik is head of global equities at Nuveen.