Even as the global economy staggers towards reopening, the biggest risk facing investors is not the threat of inflation, but complacency.
Many economies are still shut, and will remain so for another six to nine months, says the majority of a panel of 42 portfolio managers, strategists and economists in Natixis Investment Managers’ mid-year survey. With lockdown restrictions pulling the brakes on economies every few months, investors could risk getting too comfortable, riding on market optimism for a “post-pandemic world” that, so far, has only existed on paper, says Natixis.
Natixis highlights complacency as the biggest risk in the annual survey, with a laissez-faire market sentiment weighing most heavily on its experts’ minds. Covid-19-related worries of new variants and low vaccine participation, while timely, were viewed as lower-risk factors compared to inflation and geopolitical risks.
No single risk stood out for Natixis’ strategists in this annual survey, with no risk factor rated above an average of seven on a scale of 10.
After a first half that produced double-digit returns in most developed markets, strategists were evenly split on whether the rally can continue into year-end (43%), or returns will remain stuck in a range through the second half (45%). Only a small minority (12%) anticipated a complete reversal of fortune with a market sell-off.
Experts score key risks for investors in 2H2021 (Graphic: Natixis Investment Managers)
The outlook is “not surprising”, notes Natixis, given that receding tailwinds are not turning into headwinds for investors. Vaccination efforts are still advancing globally, central banks remain extremely accommodative, company earnings should continue to recover and fiscal stimulus, while past its peak, remains expansionary. “Taken together, the views suggest that investors should monitor risks and be on the watch for potential headwinds,” noted Natixis at a press briefing on July 21.
Natixis Investment Managers ranks among the world’s largest asset management firms with more than US$1.3 trillion ($1.77 trillion) in assets under management. Headquartered in Paris and Boston, Natixis Investment Managers is a subsidiary of Natixis. Listed on the Paris Stock Exchange, Natixis is a subsidiary of BPCE, the second-largest banking group in France.
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More than a year into the pandemic, Natixis’ experts believe that long-term consequences of the last year will be revealed in time. “Still, the year-end outlook remains constructive, with few risks on the horizon, suggesting investors best keep their eyes wide open as the long-term effects slowly begin to unfold,” warns Natixis.
Inflation will prove transitory, driven by consumers fresh out of lockdown and flush with cash, coupled with supply-chain bottlenecks, says Lynda Schweitzer, co-team leader of global fixed income at Boston-based investment management firm Loomis Sayles, which was acquired by Natixis in 2000.
“But the risks are clearly to the upside. Even the [US Federal Reserve] had to acknowledge that inflation would run hot in 2021, though it is confident it will not spiral beyond that,” she says.
Of all factors that could impact market performance in 2H2021, strategists say the Fed’s moves matter most, rating them 7.2 out of 10. The outlook for emerging markets in the second half of the year is also dependent on the Fed, say respondents, as emerging-market outperformance is dependent on a stable dollar and stable rates.
But not everyone thinks so. While 31% of Natixis’ experts rejected the possibility that emerging-market equities will outperform their developed-market counterparts in 2H2021, the rest believed it will happen.
Some 10% saw emerging-market equities as definite outperformers, while the others attached caveats to their exuberance: if US yields stay below 1.75% (21%), for example; if the US dollar does not strengthen further (24%); or if China’s growth remains robust (14%).
One of the key market trends to come out of the pandemic has been the rotation to value investing, says Natixis. Looking at 2H2021, 64% of those surveyed said value has at least a few more months to run, though only a quarter (26%) believed that outperformance could last for a few years. Only 10% believed the value run is already over, a sentiment that was strongest among the 21% of respondents who see markets stalling in the last two quarters of 2021.
“For value to continue to outperform, we will need inflation to prove transitory and further fiscal spending by the federal government,” says Chris Wallis, chief investment officer at the Houston-based Vaughan Nelson Investment Management, who was among the respondents.
In considering two of the leading investment stories to come out of the pandemic, Natixis’ strategists had the strongest convictions about environmental, social and governance (ESG) investing. “Throughout the pandemic, ESG strategies generated impressive results in terms of both returns and asset growth,” says Natixis.
On ESG investing, 48% said such investments are becoming mainstream and 26% called them a “must-have” investment.
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The respondents were surprisingly reserved towards cryptocurrencies, given how cryptocurrencies have been grabbing headlines over the past year and with several top Wall Street names embracing this as a new asset class.
Not one of the 42 strategists surveyed believed cryptocurrencies are a bona fide alternative to traditional currencies. Rather, 17% said cryptocurrencies are “nothing more than a fad” and 12% believed they are “a disaster waiting to happen”.
Across sectors, respondents repeated their outlook of winners from last year’s survey, as the “post-pandemic” era remains elusive. This year, strategists called for technology (88%), healthcare (83%), ESG investing (76%) and housing (74%) to be the winners from the crisis.
Convictions did not run as strongly for energy (38%) and travel (52%), an outlook that aligns with a full reopening sometime in the first half of 2022 rather than the last half of 2021, says Natixis.
“We hear a lot of concerns about peak growth, and we remind investors not to confuse peak growth with peak momentum,” says Jack Janasiewicz, portfolio strategist at Natixis Investment Managers. “We expect the pace of the recovery to ease, but ease to levels that are still very supportive for corporate earnings.”