While many of us may be looking ahead to a summer break, we are also looking back on a successful, albeit eventful, first half of the year. Against a backdrop in which the economic recovery withstood further waves of the coronavirus pandemic, but in line with our expectations, financial markets delivered solid returns.
Real assets such as equities and commodities outperformed nominal assets such as bonds, a pattern that is characteristic of a reflationary environment when economic growth recovers, inflation remains broadly in check, and monetary and fiscal stimulus remains clearly supportive.
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In our latest Investment Committee meeting, we reassessed our views to ensure we are adequately positioned going into the second half. We retain a positive view on equities in the mid-term, as we expect strong economic growth to lead to further above-average earnings growth, which should reduce currently elevated price-earnings ratios.
Yet, as our tactical indicators still signal caution, we consider it prudent not to increase equity allocations above their strategic levels for the time being. We maintain an underweight allocation to government bonds, as we believe yields should eventually move higher again as economic growth remains strong.
We took profit on our successful commodities view last month, which proved to be a well-timed decision as commodities have since consolidated and we expect returns to be muted in the months ahead.
As we look toward the next half of the year, the very strong economic growth, together with inflation, are likely to trigger some changes in terms of how central banks view future monetary policy. As a result, there could be more volatility, both on the global yield side with potentially higher yields, as well as more volatility in equity markets and financial markets in general. It is all about managing the risks in the second half in the context of strong economic growth.