As stocks around the world continue to smash one record after another, some of the world’s biggest money managers have a simple message: Get used to it.
The likes of BlackRock Inc., State Street Global Markets, UBS Asset Management and JPMorgan Asset Management expect equity markets to keep rising in the second half of the year, with many investors increasingly looking outside the U.S. for more returns.
Globally, the asset class’s allure amid a continued economic rebound is proving too hard to resist, even though the MSCI All-Country World Index has already sailed 12% this year to an all-time high. While some market players caution about risks of a dip given punchy valuations, the sharp bounce in corporate earnings and strong central bank support are expected to keep the rally alive.
“Vaccination is accelerating globally, major central banks remain extremely accommodative, fiscal support is still present and earnings continue to recover,” said Esty Dwek, head of global market strategy at Natixis Investment Managers. “In such an environment, it is difficult to imagine a very negative scenario for equities.”
Of course, pitfalls abound. Here is a look at some of the factors keeping investors hooked on equities despite the risks:
No Place Like Equities
One reason behind the rally in equities is that there is still nothing as attractive as stocks out there, given that developed-market government bond yields remain lackluster and credit spreads have tightened to their lowest levels in over a decade.
That is coupled with a lot of pent-up demand, now that economies are reopening following last year’s lockdowns. Goldman Sachs Group Inc. strategists recently flagged that U.S. money-market fund assets have ballooned to a record $5.5 trillion during the pandemic, showing that there is a lot of cash on the sidelines.
“Many indicators suggest there is still overwhelming liquidity in the system that is looking for a home,” said Carsten Roemheld, capital markets strategist at Fidelity International.
Given strong support from global central banks, flows will continue to go into equities, though return expectations should be much lower from here, Roemheld added.
Looking ahead, investors have a preference for cyclical and value stocks overall, which are set to benefit most from a rebound in growth. In terms of regions, many professional investors said that they preferred Europe, which is set to get a boost from its high exposure to such equities, and Japan, whose stock market has lagged the U.S.
Easy Does It
While worries that the U.S. Federal Reserve is going to tighten policy more quickly than expected ruffled markets last month, investors still don’t see the central bank raising interest rates any time soon, or at least not too rapidly.
Overall, market players expect central bank policy to remain accommodative in order to support economies emerging from the chaos of the pandemic.
“For now, monetary policy and fiscal policy remain loose around the world and, in reality, it will be some time before rates start to rise,” said Ben Lofthouse, head of global equity income at Janus Henderson Investors.