Global equity markets are making steady progress this summer with an increase of more than 1,7% in July. Over the period, the US and European markets have risen in tandem and sovereign yields have fallen overall. Economic indicators remain on the right track for the moment, with expected growth of 6,5% in the United States and 4,6% in the eurozone. At a sectoral level, manufacturing activity remains high but stagnant, while the reopening of economies and vaccination campaigns have enabled more progress in the services sector.
The mystery of whether current inflation levels are long-lasting or temporary remains unsolved for market participants. For July, inflation in the United States was measured at 5,4% in annual terms for the second month in a row. However, a more detailed analysis of the basket in question seems to confirm the Fed’s view that this high inflation is due more to temporary factors.
Sustained high inflation is one of the major risks, as it would push up bond yields, while low interest rates are one of the most important arguments in favour of equities over bonds.
The other significant risk is the health situation, due to the COVID-19 variants. New infections are mostly related to the more contagious factor of the variants, but in the majority of developed countries, severe cases and deaths remain contained thanks to vaccinations. However, the situation is more serious in the less wealthy areas of the world.
While the economic recovery is still under way, inflation risks, the risks associated with a tightening of the Federal Reserve’s monetary policy, health risks and high valuations in the equity markets are giving investors reason to be cautious.
However, we still firmly believe that any changes in accommodative monetary policies can only be implemented very gradually and that, if this is the case, the US Federal Reserve will support the markets with great caution to avoid the panic moments already seen post-financial crisis. Moreover, note that it is still too early to state with certainty whether current inflation levels in the United States will be sustained.
For this reason, we have maintained a favourable position on equities with an increased bias towards growth stocks. We have also maintained our exposure to cyclical stocks, although the recent interest in these stocks may be waning. Indeed, the economic recovery, which until now has been driven by the manufacturing sector, should now be driven more by services.
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