The “Roaring Twenties” lived up to the hype in the first half of 2021 as the S&P 500, FTSE 100, Shanghai Composite and other major indexes posted double-digit returns. But rising right along with returns were two factors that experts from across the Natixis Investment Managers family say investors should keep an eye on in the second half of the year: inflation and valuations.
Results of a midyear survey of 42 experts representing Natixis Investment Managers, 16 of its affiliated asset managers, and Natixis Corporate and Investment Banking show that even as the market considers the first real dose of inflation in 13 years, complacency may actually be the biggest risk facing investors.
“The Wall of Worry continues to keep sentiment in check. We hear a lot of concerns about peak growth, and we remind investors not to confuse peak growth and peak momentum. We expect the pace of the recovery to ease, but ease to levels that are still very supportive for corporate earnings,” says Jack Janasiewicz, Portfolio Manager & Portfolio Strategist, Natixis Investment Managers.Big Returns Not Signaling Full Economic Recovery
Despite big returns from investment markets, the global economy has not yet fully reopened. After more than a year of quarantines, shutdowns, and setbacks, 57% of strategists surveyed project it will take another six to nine months for the world to fully reopen. Others are evenly split between whether the economy is off to the races to reopen by the end of 2021 (21%) or reopening will drag on until the second half of 2022 (19%).
Regionally, sentiment runs most positive for the US economy. After watching it reopen sooner and faster than expected, with Q2 growth set to be 11% (annualized), two-thirds say they expect it to neither stall nor overheat in the second half, suggesting still strong growth ahead. Looking at China, where economic growth has recovered to pre-pandemic levels, six in ten say the recovery has already peaked. Less than one-third (31%) think there’s more room for the Chinese economy to run in the second half of the year. In Europe, where vaccination efforts are a few months behind the US and reopening is set to accelerate during the second half, 57% believe the economy will continue to lag the US, though 43% do believe it will catch up to the rest of the world through the end of the year.Few Correction Concerns
Market projections among those surveyed follow the outlook on growth. After a first half that produced double-digit returns in most developed markets, strategists are evenly split on whether the rally continues into year-end (43%) or returns remain stuck in a range through the second half (45%). Few (12%) anticipate a complete reversal of fortune with a market selloff.
The outlook is not surprising given that even if tailwinds are receding, they 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.
Respondents believe that markets can weather higher yields as long as they remain below 2%. Most anticipate that rates on 10-year Treasuries will increase through the second half of the year, with six in ten (57%) projecting rates will end the year between 1.75% and 2%. Another quarter of respondents (24%) project yields will remain in their recent range into the end of the year (1.5–<1.75%). Less than one in five (14%) believe yields will break above 2% during the second half, but less than 5% think yields end below 1.5%, where they’ve hovered recently.Is No Risk the Real Risk?
Asked to rank the risks that could derail the outlook, strategists put inflation (6.6) at the top of the list, followed by valuations (6.1) and complacency (6.0). With no risk rated above a 7 on a scale of 10, no single risk stands out on its own. Taken altogether, the views suggest they are to be monitored and investors should be on the watch for potential headwinds.
“Indications are that inflation will prove transitory, driven by consumers fresh out of lockdown and flush with cash, coupled with supply chain bottlenecks. But the risks are clearly to the upside. Even the Fed had to acknowledge that inflation would run hot in 2021, though it is confident it will not spiral beyond that,” states Lynda Schweitzer, Co-Team Leader of Global Fixed Income, Loomis Sayles.
Concerns about valuations are slightly above average, reflecting a market reality, but after a prolonged run-up in stocks and little volatility since last March, it appears that complacency may be the bigger issue investors will need to contend with.
With the pandemic no longer front and center, more traditional market risks are back, but none stand out: Despite all-time highs in many markets, bubbles (5.6) rank only as an average risk concern. US/China tensions rate only a 5.4, indicating the market either finds promise in a new administration or simply doesn’t care anymore. Similarly, geopolitics (5.4) don’t factor greatly in the risk picture, and with global vaccination rates beginning to climb, the spread of Covid variants (5.3) is not a significant cause of concern.
Central banks pose little in the way of risk, according to strategists. The Fed has focused on “forward guidance” and its plans for eventual rate hikes, with little expected to change this year and hikes in 2023 a more realistic outcome. As a result, strategists see little to worry about in terms of a taper tantrum (5.3) or central bank policy mistakes (4.7).
With generally low average risk metrics, strategists’ concern about complacency appears warranted. It rings especially true considering that investors’ return expectations are running at all-time highs. According to the Natixis Center for Investor Insight’s most recent survey, individual investors report long-term return expectations of 14.5% above inflation1
or about 174% greater than the 5.3% that financial professionals call realistic over the long term.2
With expectations running high and investors stretched out on the risk spectrum, it could take little to shake their confidence and bring the bulls back to earth.
Value Continues to Lead in Equities
One of the key market trends to come out of the pandemic has been the rotation to value investing. Looking into the second half of the year, 64% of those surveyed say value has least a few more months to run, though less than one-third (26%) believe that outperformance could last for a few years. Only 10% believe the value run is already over, a sentiment that runs strongest among those who see markets stalling (21%) 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, Vaughan Nelson Investment Management. It All Comes Down to the Fed
Of all factors that could impact market performance over the second half of 2021, strategists say that Fed moves matter most, rating them 7.2 out of 10. Similarly, they cite economic data releases (6.7), fiscal spending (6.1) and liquidity (6.0) as key leading market drivers, demonstrating just how much sway central banks continue to hold over markets. Valuations (5.2), vaccinations (5.1) and geopolitics (5.0) round out the pack, showing that respondents are looking past the pandemic and that, while valuations are high, they often do not lead to a correction on their own.
The outlook for emerging markets in the second half of the year is also dependent on the Fed, according to our respondents. Indeed, 45% of respondents caveat their call for EM outperformance with the dollar remaining contained and yields remaining contained, showing how far-reaching the Fed’s impact is. Only 10% of respondents gave an outright “yes” to EM outperforming into the end of the year, while 14% say EM needs Chinese growth to remain robust and nearly one in three (31%) said “no,” emerging markets will not outperform during the second half of 2021, regardless of any caveats. Post-pandemic Winners Remain the Same
As we start to look past the pandemic, respondents saw little change in the projected post-pandemic winners compared to last year’s survey. This year, strategists call for technology (88%), healthcare (83%), ESG investing (76%), and housing (74%) to be the winners from the crisis. Despite REITs’ recent strong performance, strategist sentiment indicates little hope that the run will continue over the long term as 83% look for commercial real estate to be a loser. Given that nearly six in ten (57%) put stay-at-home business in the winners’ column, it appears many think it will take time for the sector to mirror the return to the office. Convictions do not run as strong for energy (38% winner, 62% loser) and travel (52% winner, 48% loser), an outlook that aligns with a full reopening sometime in the first half of 2022 rather than the last half of 2021.ESG for Real. Crypto, Not So Much.
In considering two of the leading investment stories to come out of the pandemic, Natixis strategists have the strongest convictions about ESG (Environmental, Social, and Governance) investing. Throughout the pandemic, ESG strategies generated impressive results in terms of both returns and asset growth. Few think the success will be short-lived, as one in ten of those surveyed think of ESG as a fad. Instead, 48% say these investments are becoming mainstream and 26% call them a must-have investment.
While cryptocurrencies have been grabbing headlines over the past year, two-thirds of those surveyed believe the market under-appreciates the risks, 17% say crypto is nothing more than a fad and 12% believe it is a disaster waiting to happen. Not one of the 42 strategists surveyed believes cryptocurrencies are a bona fide alternative to traditional currencies.Sleep With One Eye Open
More than a year into the pandemic, with light at the end of the tunnel, our strategists believe that long-term consequences will be slow to unfold. Still, the year-end outlook remains constructive, with (too?) few risks on the horizon, suggesting investors best keep their eyes wide open.About the Natixis Strategist Outlook
The Natixis Strategist Outlook is based on responses from 42 experts including 32 representatives from 16 of Natixis’ affiliated asset managers, 5 representatives from Natixis Investment Managers and 5 representatives from Natixis Corporate & Investment Banking.
• Adam Abbas, Portfolio Manager and Co-Head of Fixed Income, Harris Associates
• Michael Acton, CFA®
, Managing Director, Head of Research, AEW Capital Management
• Carl Auffret, CFA®
, Fund Manager, European Growth Equity, DNCA Investments3
• Pierre Barral, Head of Absolute Return Portfolio Management, Natixis Investment Managers Solutions
• Benito Berber, Chief Economist for Latin America, Natixis Corporate & Investment Banking
• Axel Botte, Global Strategist, Ostrum Asset Management
• Michael Buckius, CFA®
, Chief Investment Officer, Gateway Investment Advisers
• Craig Burelle, Senior Macro Strategies Analyst, Loomis Sayles
• Rafael Calvo, Managing Partner, Head of Senior Debt and Co-Head of Origination, MV Credit
• François-Xavier Chauchat, Global Economist and member of the Investment Committee, Dorval Asset Management
• Isaac Chebar, Fund Manager, European Value Equity, DNCA Investments3
• Elisabeth Colleran, CFA®
, Portfolio Manager, Emerging Markets Debt Team, Loomis Sayles
• Mounir Corm, Deputy Chief Executive Officer and Founding Partner, Vauban Infrastructure Partners
• Michael Crowell, Co-Director of Macro Strategies and Director of Quantitative Research Risk Analysis, Loomis Sayles
• Carmine de Franco, PhD, Head of Fundamental Research, Ossiam
• Stéphane Déo, Head of Markets Strategy, Ostrum Asset Management
• Esty Dwek, Head of Global Market Strategy, Natixis Investment Managers Solutions
• Amber Fairbanks, CFA®
, Portfolio Manager, Global Equity, Mirova US4
• Jean-Jacques Friedman, Chief Investment Officer, Vega Investment Managers5
• Pascal Gilbert, Fund Manager, Fixed Income and Global Macro, DNCA Investments3
• James Grabovac, CFA®
, Investment Strategist, Municipal Fixed Income Team, Loomis Sayles
• Alexander Healy, PhD, Chief investment Officer and Portfolio Manager, AlphaSimplex Group
• Brian Horrigan, CFA®
, Chief Economist, Loomis Sayles
• Jack Janasiewicz, CFA®
, SVP, Portfolio Manager & Portfolio Strategist, Natixis Investment Managers
• Nicolas Just, CFA®
, Deputy CIO and CEO, Seeyond
• Kathryn Kaminski, PhD, CAIA, Chief Research Strategist & Portfolio Manager, AlphaSimplex Group
• Brian P. Kennedy, Portfolio Manager, Full Discretion Team, Loomis Sayles
• Karen Kharmandarian, Chairman and Partner, Thematics Asset Management
• Ibrahima Kobar, Deputy CEO, Global CIO, Ostrum Asset Management
• Joseph Lavorgna, Chief Economist for the Americas, Natixis Corporate & Investment Banking
• Troy Ludtka, US Economist, Cross Asset Research, Natixis Corporate & Investment Banking
• Garrett Melson, CFA®
, Portfolio Strategist, Natixis Investment Managers
• Jean-Charles Mériaux, Chief Investment Officer and Fund Manager, DNCA Investments3
• Jens Peers, CFA®
, CEO and CIO, Mirova US4
• Cyril Regnat, Head of Research Solutions, Natixis Corporate & Investment Banking
• Lynne Royer, Portfolio Manager, Co-Head of Disciplined Alpha Team, Loomis Sayles
• Dirk Schumacher, Head of European Macro Research, Natixis Corporate & Investment Banking
• Lynda L. Schweitzer, CFA®
, Portfolio Manager, Co-Team Leader of Global Fixed Income Team, Loomis Sayles
• Christopher Sharpe, CFA®
, SVP, Portfolio Manager, Natixis Investment Managers
• Frank Trividic, Deputy Chief Investment Officer, Seeyond
• Hans Vrensen, CFA®
, MRE, Managing Director and Head of Research & Strategy, AEW Europe
• Chris D. Wallis, CFA®
, CPA, CEO, CIO, Senior Portfolio Manager, Vaughan Nelson Investment Management
1 Natixis Investment Managers, Global Survey of Individual Investors conducted by CoreData Research, March–April 2021. Survey included 8,550 investors in 24 countries.
2 Natixis Investment Managers, Global Survey of Financial Professionals, conducted by CoreData Research in March–April 2020. Survey included 2,700 financial professionals across 16 countries.
3 A brand of DNCA Finance.
4 Operated in the US through Mirova US, LLC (Mirova US). Prior to April 1, 2019, Mirova operated through Ostrum Asset Management US, LLC (Ostrum US).
5 A wholly-owned subsidiary of Natixis Wealth Management.
Only SEC-registered affiliates provide advisory services to US Persons and certain of the affiliates advise pooled investment vehicles that are not publicly offered within the US. In no case should this be viewed as an offer by an unregistered affiliate to provide services to US Persons or as an offer to sell, or the solicitation of an offer to purchase, a security that is not registered for sale in the US.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed are as of June 2021 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.
All investing involves risk including the risk of loss.
Equity securities are volatile and can decline significantly in response to broad market and economic conditions.
Fixed income securities may carry one or more of the following risks: credit, interest rate (as interest rates rise bond prices usually fall), inflation and liquidity.
Commodity-related investments, including derivatives, may be affected by a number of factors including commodity prices, world events, import controls, and economic conditions and therefore may involve substantial risk of loss.
Foreign and emerging market securities may be subject to greater political, economic, environmental, credit, currency and information risks. Foreign securities may be subject to higher volatility than US securities, due to varying degrees of regulation and limited liquidity. These risks are magnified in emerging markets.
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