As the global economy maintains its recovery path in the second half of this year, Schroders recommends investors to focus on long-term structural trends, while at the same time, to balance short term risks.
During a period of expansion, equities will generate the most desirable returns over the next six- to-12 months, Keiko Kondo, deputy head of multi-asset investments Asia at Schroders, told a media briefing last week.
“If central banks are to raise interest rates, we believe this would be due to an uptick in economic activities which may in fact be a positive [indicator] for equity markets”, said Kondo.
She believes corporate earnings will recover 40% to pre-pandemic levels by the end of this year, and earnings growth will be at a healthy 5% to 10% next year, which will be a key driver of the markets.
In particular, she favours European equities, which have lagged as the region’s economies have struggled due to widespread lockdowns. Forward earnings per share ratios for European stocks have been on a downward trend since 2008, but Schroders believes they have reached the bottom.
“All in all, we remain overweight equities, but we have toned down the cyclical nature of our portfolios by removing the explicit tilt to value. The ongoing cross-current of Covid-19 inevitably complicates the cyclical picture and we remain vigilant of the risks,” said Kondo.
Moreover, because of the difference in US and European central bank policies, Schroders recommends that US dollar-based investors should hedge their euro exposure back to the dollar when buying European equities.
“We expect the US dollar to play a key role in providing hedges in the portfolio context. Particularly we prefer long US dollar versus euro given the central bank policy divergence,” said Kondo.
However, Kondo is negative on developed market bonds, especially in the US where nominal yields are too low to compensate for rising inflation.
On the other hand, China government bonds offer higher yields, and the market is underpinned by prudent government spending now that the country’s post-pandemic economic recovery is firmly on track.
Thematic investing
Kondo also stressed the importance of implementing strategies that reflect global investment trends that are already changing the world, instead of focusing on headlines and indicators.
“One thing that we have learned from the pandemic is that people can come together to identify issues, find solutions, and adapt fairly quickly to change. Innovation plays a key role in this, and we believe this should be one of the focal points in assessing investments for the long-term,” said Kondo.
She highlighted three themes that have accelerated as people have changed their behaviour during the pandemic: innovative transformation, environment and sustainability, and cities and lifestyles.
“While it is very possible for each theme to provide ample returns over time, short term performance can vary. We believe dynamic asset allocation across equities and bonds and diversification in themes can reduce the return volatility and make the journey smoother for investors,” said Kondo.
