BOSTON, July 20, 2021 – Results of a mid-year survey of 42 portfolio managers, strategists and economists representing Natixis Investment Managers (Natixis), 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.
More than a year into the pandemic, with light at the end of the tunnel, Natixis experts believe that long-term consequences of the last year will be slow to unfold. 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. The “Roaring Twenties” lived up to the hype in the first half of 2021 as most major indexes posted double-digit returns and, looking into the second half of the year, strategists said along with rising returns, investors should watch inflation and valuations.
“The Wall of Worry continues to keep sentiment in check. We hear a lot of concerns about peak growth and we remind investors to not 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 for Natixis Investment Managers Solutions.
Is Complacency the Real Risk?
No single risk stood out for Natixis strategists in this annual survey, with no risk factor rated above an average of 7 on a scale of 10. Taken together, the views suggest that investors should monitor risks and investors 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,” said Lynda Schweitzer, Co-Team Leader of Global Fixed Income, Loomis Sayles.
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 at least a few more months to run, though only a quarter (26%) believe that outperformance could last for a few years. Only 10% believe 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, 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.
The outlook for emerging markets in the second half of the year is also dependent on the Fed, according to our respondents. Emerging market1 outperformance is dependent on a stable dollar and stable rates.
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 investing.2 Throughout the pandemic, ESG strategies generated impressive results in terms of both returns and asset growth.
While cryptocurrencies have been grabbing headlines over the past year, not one of the 42 strategists surveyed believes cryptocurrencies are a bona fide alternative to traditional currencies.
Post-Pandemic Winners Remain the Same
As we start to look post-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.
Given that nearly six in ten strategists (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.
