Global equities made new highs in July. The US market outperformed led by the FANG stocks. Markets elsewhere were more subdued as the Delta variant continued to spread.
A significant positive was the slowdown in the UK’s Covid daily infection rate. Not only have vaccines decidedly broken the link between infections and hospitalisations, but new cases are falling. Outside of the UK the Delta variant continues to spread with recent outbreaks in Asia bringing into question the sustainability of eradication strategies. The proliferation of the Delta variant continues to obscure the underlying strength of the global economy. Despite US inflation reaching 5.1%, the bond market rallied further. Various reasons have been put forward for the strength in bonds with mixed economic data and increased Covid uncertainty seeming the most likely culprits. Consistent with the decline in bond yields, growth stocks outperformed. However, as the impact of the delta variant wanes, we expect the reflation trade to reassert itself in the second half and for value to outperform.
We believe the global economy remains robust. Consumer and corporate balance sheets have been protected by government handouts. Our strong belief is that neither household’s or businesses have fundamentally altered their desired cash balances in response to the crisis and any excess savings will ultimately be spent. Even if the impact of the delta variant persists for longer than anticipated, policy support will be extended. The earnings season has got off to a positive start and looks to be fuelling a new capex cycle. This suggests that despite concerns over peaking growth and a slowdown in the second derivative, the outlook for equities remains positive. Multiples in certain sectors may appear extended, but valuation in isolation has historically been a very poor predictor of returns. With policy supportive and earnings strong we believe the current rally has further to run.