The slowdown in growth and recovery has made markets nervous, which could lead to increased volatility in the coming months.
Globally, markets are continuing to watch events in China, as well as communications from the Fed closely. The market also remains focused on further labour market progress, whether consumers will spend a significant portion of the additional savings they have accumulated since the start of the pandemic, and relatedly, whether higher inflation will be transitory.
Across major economies, the market appears to be pricing in a small and gradual rise in interest rates over the next few years. This said, our outlook for policy rates is more aggressive than the markets’ one, as our inflation forecast is stronger than the market’s and we see significant risks of a hawkish turn in monetary policy over our two-year forecasted horizon.
In terms of the outlook for markets, we expect that 4Q 2021 will show continued positive momentum for equity markets and we are optimistic that a more gradual and digestible rise in rates will ensure a friendly environment for diversified portfolios.
Investors interested in Emerging Markets (EM) will be pleased to see many getting on top of the virus with surging vaccination rates. From the equity markets’ point of view, the pandemic has undoubtedly changed the risk-reward balance for EMs, and there is significant dispersion of regional and country outcomes.
In other words, there is ample opportunity for active asset managers in the EM equity space, especially in an overall benign US dollar environment.
We are particularly optimistic about countries such as India and Southeast Asian countries including Indonesia which appear to have now passed the worst of the pandemic. Equity markets are likely to price in the regional recovery as consumers return and manufacturers recapture export share from China in 4Q 2021.
China’s economy appears to have slowed during the third quarter. It now is becoming increasingly clear that the initial strong Chinese recovery, following its greater success in effective virus control, was led by exports and production, while consumption lagged somewhat. Now that inventories have built up (in contrast to many other countries), output is beginning to slow again, back to an underlying growth trend that is lower than we saw pre-pandemic.
However, we believe it is most likely that growth picks up again through the early part of next year, in response to a combination of domestic policy stimulus and global demand, which remains strong.
Globally, despite volatility, the market outlook is positive as recovery continues. However, investors must remain aware of the economic backdrop. There is much talk of the economic ‘cycle’ and investors must be careful if listening to the noise. Business cycles are often long and drawn out, whereas, what we have been through is quite different.
We have experienced a purely ‘exogenous’ shock, the economic effects of which were always likely to wear off quite quickly once the worst of the shock had passed. Investors trying to time markets using traditional ‘cycle’ methodology could be doomed for failure, largely because it fails to take account of the source of the shock and the very different implications of that for the economy and markets.
We recommend a nuanced approach to investing and for investors to remain on top of idiosyncratic developments.
Lale Akoner is senior market strategist at BNY Mellon Investment Management
Photo: Bloomberg
