ALTHOUGH global equities have already run up quite significantly, there remains room for the market rally to continue through the remaining six months of this year.
According to Affin Hwang Capital Asset Management chief investment officer/deputy managing director David Ng, there are still ample opportunities for investment in global markets, supported by excess liquidity and continued economic recovery from the Covid-19 crisis.
In addition, he says, inflation is unlikely a threat, as the recent rise in prices is not expected to be persistently high for an extended period.
“Given our house view on excess liquidity, inflation being transitory and different parts of the economy reopening, we believe there are ample investment opportunities.
“An uneven global recovery, coupled with different sector beneficiaries from an economic reopening, presents dispersed opportunities in the market, ” Ng explains.
However, he reckons, markets could consolidate in the near-term on an index level due to a lack of catalysts as well as already high expectations.
“The key is to be selective as the easy money has already been made, ” he stresses.
Ng expects long-term growth stocks, which have lagged in recent months, to start to perform again, as inflationary pressure eases.
“We could then see a rotation in the market from cyclicals back into growth this year, ” he says.
“In terms of portfolio positioning, we have increased exposure to cyclicals and reopening plays, with some positions in defensive sectors, as markets have done well, ” he adds.
Focus on quality
The fund manager favours owning quality names, with longer term-growth prospects as such companies have better growth visibility.
From an investing philosophy perspective, he points out, the group prefers to view investing as being owners of the respective businesses. As such, it is crucial to invest in quality names and in good management.
“We will consider adding further into cyclicals in line with our macro view of global economic recovery. However, we will wait until there are better price points for us to deploy into the sector, ” Ng says.
“This is given what we have seen in China’s credit impulse data, as a major consumer of commodities. If credit impulse continues to decline, we believe commodity prices will take a breather at which point we will consider increasing exposure to cyclicals, ” he adds.
Ng notes technical indicators seem supportive of a positive trend of the market, with the Bank of America Bull/Bear index hovering at around seven points on a scale from 0 to 10, suggesting sentiment is bullish but not extreme.
“We have seen strong inflows back into global equities, though the current pace is not likely to be sustainable, ” he says, noting a large chunk of the inflows went into value funds/sectors last year as opposed to growth or technology stocks.
“Inflows into these value strategies largely came from the reasoning that they would benefit from a reflation trade, particularly those invested in commodities, materials and financials, ” he adds.
Meanwhile, earnings expectations are also pointing in the right direction across all regions, with earnings revision ratio hitting above 1.0, which signals more upgrades than downgrades.
In this respect, US corporations are currently leading the way, Ng points out. Nevertheless, Europe and Asia are expected to catch up soon as the Covid-19 vaccination rates accelerate in those regions.
“Growth expectations have been revised strongly upwards, especially coming off from a torrid 2020 when the pandemic hit. But this pace of growth is unlikely to be sustainable due to the base-year effect, ” Ng argues.
“As we enter the second half of 2021, this pace of growth will moderate as conditions normalise. But the important point is that so long there is still growth and we are not heading into a recession, equities will continue to see support, ” he adds.
He notes that liquidity remains ample as global central banks embarked on a slew of easing measures last year to cushion the economy from the Covid-19 fallout. While liquidity might start to taper off due to the base-year effect again, there remains a high level of liquidity in the system, he says.
“Based on recent signals by the US Federal Reserve (Fed), it is unlikely that the central bank would start tightening any time soon. The Fed is taking the view that inflation is transitory and will not prematurely raise rates, ” Ng says, citing employment and labour data have yet to recover to pre-Covid-19 levels.
Time to be selective
Echoing the optimistic view, HSBC says the overall outlook continues to be positive for global market for the second half of this year, although some counties are battling new waves and variants of Covid-19.
“Our tactical outlook remains firmly pro-risk. Inflation concerns persist, even though we think that this will be transitory.
“Our belief is that corporate earnings will continue to be strong over the coming months, driven by the reopening of the services sector. This should support equity performance in the second half of the year, looking beyond the prevailing market sentiments, ” the global banking group says in its recent report.
However, HSBC stresses it is time to be selective.
“Markets have done well this year and there is an argument that the ‘easy money’ may have been made already. Valuations are now higher, meaning that there is less margin for error if things don’t go to plan, ” it explains.
“We think the rally will continue, but investors need to be selective on sectors and geographies that are well-positioned for recovery” it adds.
The banking group also favours cyclical investments, with the services sector expected to drive the next phase of recovery, as the sector stands to benefit from consumers being able to go out and spend again.
“We think that this wave of pent-up demand is particularly positive for the consumer discretionary sector, ” HSBC says.
“Thinking longer-term, structural trends such as technology and sustainability are here to stay, ” it adds.
Geographically, the group likes the United States, United Kingdom, Mainland China and Singapore equity markets, citing these economies have done relatively well in navigating the pandemic.
While the banks conviction is that equities are still the place to be for the coming months, it stresses that investors still need to ensure their portfolios are appropriately diversified. This is because concerns around inflation and the pandemic are by no means over, and volatility may very well rear its head periodically.
“Cash offers poor returns and erodes your purchasing power over time, while bond yields, despite rising slightly as of late, are still at record lows globally.
“More than ever, a multi-asset approach that has appropriate allocations to high-quality bonds alongside riskier asset classes is the best way to approach investing, ” it says.