Strategic Direction

Opening up

We hinted at it in our previous Investment Outlook: an economic restart was imminent. This restart is now in full swing. As vaccination programmes are gaining pace, lockdown measures are being lifted. Gradually, society is opening up. This means that the economy is opening up as well.


03/06/2021 – Richard de Groot

Producers are looking more positively to the future. And while consumers changed their behaviour during the covid-19 crisis, they never really stopped spending. This positive news has been supporting equity markets.

Are investors too optimistic?

Many equity indices reached new highs in the first quarter. It brings up the question if investors are getting too optimistic. We have three main reasons to believe that this is not the case. First, the reopening of the economy is an important driver for growth and higher earnings. During the pandemic, consumers have been spending their money predominantly on goods. But as restrictions are lifted, we expect consumer spending will shift more towards the important services part of the economy.

Second, interest rates are low – or even negative. Low interest rates will allow companies to borrow more cheaply to invest in growing their businesses. But that is not the only reason why low interest rates are an important support for equity markets. Due to low interest rates, investors are continuously looking for other sources of return. Savings accounts and a large part of the fixed income world are no longer providing any returns. Therefore, investors are putting their money to work in riskier assets such as equities.

Finally, there is the fiscal stimulus that is giving a further boost to the economy. Governments in many countries are helping their economies with large stimulus packages. As an example, the European Commission has announced the EUR 800 billion Recovery Fund. And in the US, a stimulus package worth USD 1.9 trillion has been approved and partially rolled out. These are very significant stimulus amounts that will lead to additional growth.

Are there no risks at all?

There are always risks to consider. Here, we would like to highlight three of them. Inflation is the first risk to consider. Strong economic growth could lead to higher inflation. If inflation gets too high, then this might trigger an increase in interest rates by central banks, to slow down that inflation. We do not believe that inflation will become an issue. We further believe that central banks are determined to keep rates lower for longer, even if inflation goes up somewhat.

The second concern is valuation. Looking at different valuation indicators, it is fair to state that equities are not cheap. In fact, certainly from a historic perspective, they are expensive. However, compared to bonds, equities are not overly expensive. In addition, it is good to remember that valuation is important but not useful for timing purposes. Equity markets can be expensive for a very long time.

Finally, investor behaviour can be a reason for concern. Almost everybody is positive and buying risky assets. That is an important warning signal. Equity markets have priced-in a lot of good news and not much bad news is needed for a correction. That said, we believe that such a correction would be temporary. It could present an opportunity to increase equity positions.

What does all of this mean for investors?

The economy is opening up and there are strong forces supporting risky assets. Against this positive background, we recommend overweighting equities at the expense of bonds. Markets have already been performing strongly. But we believe that this is justified by fundamentals and that there is still room to benefit further. In the different chapters of this outlook, you will find more ideas on how to prepare your investment portfolio for what lies ahead in the second half of 2021.

Richard de Groot – Global Head Investment Centre

The risks associated with investments

The risks associated with investments

Find out which type of investment suits you

Find out which type of investment suits you