Equities to thrive amid strong growth and inflation environment – UBS

Global equities have rallied to new highs in the third quarter of 2021, powered by strong economic and corporate earnings growth, particularly in the US and Europe. Unusually, this has coincided with a sharp fall in bond yields, with the US 10-year yield dropping as low as 1.2%, and US high yield bonds now trading at around 4.4%. Growth and inflation are likely to stay elevated. Subsequently, economists at UBS think this is a good environment for equities overall.

Emergent risks include the delta variant, China regulations and geopolitics

“In the near term, we expect growth to remain strong – we forecast global growth of 6.2% in 2021 and 5.1% in 2022 – and monetary policy to remain loose. The Federal Reserve, which is likely to announce its plans to taper quantitative easing in the fourth quarter, has been at pains to stress it will remain data dependent, and that the start of tapering does not imply any particular timeframe for interest rate increases. This creates a supportive fundamental backdrop for equities.”

“With interest rates and bond yields at low levels, fixed income investors face a dearth of yield, and higher levels of potential return are only available in alternative areas such as private credit and real estate, through volatility-selling strategies, or through more active approaches to the asset class.”

“A backdrop of global equities at record highs and interest rates at record lows is an uneasy one for many investors, and debates about the path by which the global economy returns to ‘normal’ will contribute to volatility, even if the Fed has committed to managing this process carefully. The spread of the coronavirus delta variant, China’s regulatory crackdown, and geopolitical uncertainties all present additional risks.”