Complacency at extreme levels as optimism surges

multi-asset/inflation/equities/

25 June 2021
| By Laura Dew |
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State Street Global Advisors (SSGA) is the “most optimistic” it has been in years on the global economy thanks to positive economic signals and robust fiscal stimulus.

In its global market outlook, the firm said vaccination rollouts, robust monetary and fiscal support and strengthening of global markets were all leading to optimism.

Lori Heinel, global chief investment officer, said: “Positive signs abound as economic growth heads for multi-decade highs, companies report strong earnings, and volatility recedes”.

It said inflation was currently being assumed as ‘transitory’ but that might not be the case with inflation possibly being higher than pre-COVID for the next two years.

“At the same time, rising input costs and strong demand are fuelling inflation – which may settle in at higher levels than investors are accustomed to.”

However, it warned the downside of this optimism was that it left the market vulnerable to shocks particularly from the strain on global supply chains and rising inflation.

“Complacency is not new, but has reached extreme levels recently, as evidenced by the degree to which economic policy uncertainty now exceeds equity-implied uncertainty,” it said.

“Any number of shocks could shatter the market’s fragile exuberance, from setbacks in progress against the pandemic, to market participants’ failure to appreciate the full import of US President Biden’s tax proposals, to cyberattacks, and to geopolitical conflict, among others.

“We believe two risks are worthy of particular focus: the possibility that inflationary pressures become more sustained and entrenched, and the potential that interest rates and bond yields will rise even in the absence of pronounced inflationary pressure, in response to evolving growth or a change in policy.”

It suggested investors held low volatility equities and options overlays as well as a multi-asset strategy with liquid real assets to combat inflationary pressures.

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