A gradual transition toward a more ‘normal’ mid-cycle…
We think global growth has peaked but will remain above average, boosted by broadening consumption and surging capex. A return to more ‘normal’ has already started but will likely take more time than anticipated, complicated by covid variant(s), supply chains disruptions, firming inflation, more hawkish
central banks and multiple political wildcards. The cycle remains modestly supportive for risk assets. In perspective, over the last 30 years, transitions to a mid-cycle usually resulted in a few months of less comfortable phase of wait-and-see, before more bullish market trends could resume.
… has substantial implications for the alpha backdrop.
First, market sensitivity to covid trends would gradually decline,
except for segments most hit by restrictions. Second, markets would be more driven by traditional macro fundamentals. Growth, inflation, productivity, leverage would be stronger market movers and asset prices would better respond to their
fundamentals. Third, we expect central banks to be cautious, which would limit bond market volatility, but their uneven pace would fuel greater regional and asset discrimination. These divergences would provide a pool of relative opportunities. Fourth, as global liquidity moderate, we expect fewer trading and valuation anomalies and better capital allocations, another positive for alpha. However, the biggest wildcard would come from politics, as governments seek to withdraw stimulus, reduce inequalities, and protect strategic segments. Speculative in nature, political choices regarding fiscal spending, tax and labor regimes, regulations and allocation of public investments would be the main challenges for alpha generation.
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Originally Published on September 29, 2021
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