Fiscal and monetary policy measures leave me humming the Steppenwolf song “ Born to be wild ”, which helped propel the Easy Rider film to global fame.
It’s not just because the economy has “got its motor running”, like Peter Fonda and his hippie buddies on their Harley-Davidson choppers. It’s also because they financed their wild trip across the American southwest with drug money, a fitting parallel to the global economy of today. After all, it was reborn thanks to stimulating stuff from central banks and governments.
Apart from the economy, vaccination campaigns are running at full steam. Bars, restaurants, museums and gyms are slowly but surely opening up across Europe and the US after months-long closures. The easing of restrictions and the rapid decline in new Covid-19 cases have lifted our spirits. Financial markets are thriving and leading economic indicators have been ticking higher for months. Purchasing managers’ indices have climbed to multi-year highs and seem to be as good as they can get. Companies have recovered from last year’s pandemic shock. The reporting season that just ended smashed expectations. Around three quarters of the S&P 500 companies managed to beat the already optimistic analyst forecasts, leading to further upgrades of their estimates.
In a nutshell: the economy seems to be reaching peak growth. Does this mean the highway stretching before our motorcycles is sloping downwards? Some experts warn that central banks are about to limit their extraordinary roadside assistance. Some have already started to discuss how to wean markets off stimulus programs.
We still prefer equities but brace for lower returns
We acknowledge concerns that the economic motor is now nearing maximum speed. But while equity returns will in all probability come down, they will hardly turn negative. And it’s worth noting that despite inflation worries, the readings still oscillate around historical lows. Stocks are likely to continue to be more attractive than bonds in terms of returns, so we still prefer equities to fixed income overall.
As for commodities, the rally since the beginning of the year is yet to reach its end. Some of the tailwinds that have been driving it have indeed started to wane: China’s so-called credit impulse, an indicator that tracks changes in new public and private credit as a share of GDP, has now dropped below zero. Furthermore, the most acute short-term supply issues owing to the near global lockdown in 2020 are mostly resolved. But commodities will be in demand as long as the world economy continues to expand. The ongoing efforts to mitigate climate change should also translate into strong interest for metals. We thus reiterate our favorable view on this asset class.
As you notice, the Covid-19 pandemic already seems to be a remnant of the past for the capital markets. With some luck, this will be the case for us as well in the near future. And the economy may still enjoy the high while it lasts.