Welcome back and thank you for joining us for our view of the global capital markets. In the first quarter, equities built upon their strong returns registered in 2020, while the fixed income markets lagged. This is attributable mainly to rising interest rates on the expectation of a global economic rebound. Looking further back to the pandemic lows, both equities and the credit markets registered impressive gains. Meanwhile, this risk-on tone led to results for the government bond market that were either more modest, or negative.
When looking at the stock market over the past year a little more closely, we could think of it in a couple different phases. First, starting from the pandemic lows to about the time where the US presidential election took on a keener focus, stocks sprinted strongly ahead and were led mainly by the stay-at-home names, considering the outlook for the coronavirus remained highly uncertain. However, this all changed in early November, when favorable data points on vaccine trials led to the hope of economic re-openings. This, in turn, then changed the leadership to the “going-out” stocks, which persisted throughout the first quarter.
Other elements that have led to strong market returns have been highly accommodative global central bank policies and massive amounts of fiscal stimulus delivered by many countries in an effort to jumpstart their economies.
Regarding our economic outlook for this year, we expect a favorable recovery, led mainly by the emerging markets, as well as the US. Thereafter, we anticipate growth to moderate after an expected reopening surge. And while we expect inflation to move higher in the back half of this year, we see this move moderating over time; particularly if the economy resumes to a more normal operating level, which we anticipate.
Speaking of moderation, while the capital markets have been quite strong in recent years, our longer-term return outlook for a traditional 60/40 stock and bond portfolio has grown more tepid.
Yet, that does not mean that opportunities have vanished.
Let’s begin with fixed income. While many yields are at, or near, their historic lows, opportunity remains in select segments of emerging-market debt, triple B-rated corporate bonds and certain areas of the mortgage-securities market.
That said, a global, multisector approach is still warranted, as this structure provides a higher yield versus many traditional exposure without taking investors too far out on the risk curve.
Turning to equities, historically, they’ve been able to surmount both higher levels of inflation and rising interest rates. And inflation has only proven to be a challenge in periods where it was 4% or higher––a level that is much loftier than what the market expects and what we are forecasting. As for past episodes of higher interest rates, looking back over a span of over 50 years, stocks have been able to consistently generate attractive rates of return.
An added dose of good news is there are opportunities both on the growth and value side of the equation. Common attributes to seek are companies with stable to rising profits and those that generate high levels of free cash flow.
Let’s start with value stocks. A good way to approach such equities has been to find those that are attractively priced relative to the free cash flow they generate. However, in recent years, this approach had faced several headwinds. But over the last six months, the tide for such stocks has turned for the better, as investors have put a premium on the cash they produce, along with their compelling valuations. And, despite their sharp recovery, we believe upside remains for such companies.
Regarding many quality growth stocks, rich waters exist among long term, sustainable trends that we expect to grow well in excess of the economy. Whether it be in the realm of digital payments, the focus on health and wellness, or sustainable transportation, these are areas that possess long runways to growth.
Clearly, a lot has transpired this quarter. Yet our advice remains: to be global, be selective and be active. Thank you so much. See you next time and wishing you all the best.
