Aymeric Forest, Global Head of Multi-Asset Solutions at Aberdeen Standard Investments shares his thinking with Wealth DFM.
As the vaccination programme is rolled out across the world, there is a growing expectation that the global economy will recover and normalise. Aymeric Forest, Global Head of Multi-Asset Solutions at Aberdeen Standard Investments says that the team retains their pro-equity stance, underpinned by a strong outlook for profits and accelerating economic growth. However, monetary policies in those countries that are more advanced in their recovery process could tighten in the year ahead, leading to heightened volatility for global markets.
The coming quarter may see a peak in the global economic growth rate but it should, nonetheless, remain positive. Looking longer-term, it is felt that the global economy is expected to experience two to three years of above-trend growth, which should translate into positive earnings growth. However, investors are cognisant that such a recovery will continue to be highly variable across countries.
Portfolio diversification in current markets
With inflation rising and economic growth normalising, stock and bond prices may become positively correlated, although depressed bond yields are likely to offer lower returns. In the near term, it will be important to manage portfolios actively, using cash, dynamic asset allocation and alternative assets if necessary.
Aymeric Forest commented:
“As we look for other sources of diversification, we do not see a compelling case for holding gold, given the risk that real rates increase over time. Instead, we prefer to invest in a narrowing of the spread between US and European government bond yields. There is room for nominal growth in Europe and the US to converge, with US yields having already made part of this adjustment. It will be vital that investors continue to analyse risk scenarios such as periods of accelerating inflation or tail risks associated with emerging virus variants.”
The dramatic rise in government spending during the pandemic will have long-lasting effects. Successful management of the fiscal deficit will require a combination of low government bond yields, favourable refinancing conditions and measures to control the budget deficit. US President Biden recently announced proposals to raise taxes, and higher corporate taxes will put pressure on the earnings of large US corporations. Aymeric says he expects that some of this negative impact will be offset by investments and spending from the various stimulus packages.
Global growth could also be driven more by services than manufacturing going forward. However, this will continue to be a function of how the pandemic develops in individual countries. Meanwhile, it is expected that there will be a continued rotation towards quality value and cyclical stocks. Aymeric favours developed markets over emerging market equities, with European and UK stocks most preferred. Returns across emerging market assets should also continue to diverge as a function of vaccine rollouts, commodity prices and diverging domestic fiscal and monetary policies. He believes that investors may consider moving into non-US equity markets such as Europe and Japan as these markets have lagged the US and offer some upside for earnings to surprise positively.
The rise of crypto and SPACs
One result of the extraordinary stimulus has been the rise in crypto commodities and special purpose acquisition companies (SPACs). Aymeric confirms that they have not recommended clients should invest in crypto currencies, holding the view that they are highly speculative, susceptible to manipulation and poorly regulated, with no tangible way to value them. Block chain and tokenisation are, however, important technological developments that will fundamentally transform the way in which we operate and transact as an industry.
Aymeric Forest, Global Head of Multi-Asset Solutions at Aberdeen Standard Investments said:
“The battle to defeat Covid-19 remains fraught with danger; we cannot know how this will play out and policy errors may still be made. Actively managed asset classes offer some portfolio benefits as imbalances are mounting and the dispersion between asset prices increases. 2020, for example, was a record year for active managers. As the role of government bonds in diversifying portfolios is arguably reaching its limit, multi-asset teams and active security selection will play an increasingly important role. New opportunities and risks will also have to be managed actively with the more systematic adoption of Environmental, Social and Governance (ESG) tilts in investment portfolios. Finally, asset managers are likely to expand their role and help their clients manage extra-financial risks and contribute to their solutions.”