In our latest equity outlook, we examine the critical issues investors should consider with regard to equity markets.
During first quarter 2021, equity investors, quite rightly, remained resolutely focused on the positive, medium-term outlook for corporate profits rather than the near-term challenges of the pandemic. Equity markets rallied correspondingly.
With economies globally in a synchronised recovery, higher earnings seem almost assured; in our view, it is not high valuations per se that present a risk to equities, but it is because of the high valuations that they are vulnerable to a larger-than-average sell-off in the event of a negative catalyst.
Currently high valuations mean that returns from today will likely be below the long-run averages. Normal volatility should provide a better entry point in the future, but our medium-term view remains positive, with central bank and government support in many economies continuing to underpin equity markets.
We therefore see scope for the economic recovery and rebound in inflation to further drive a rotation into value, cyclical and small-cap stocks – the so-called reflation trades. In April, these trades underwent a partial reversal, but we see this as a pause rather than an end to the trend .
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