How to invest in the second half of 2021

Following a highly impressive bull run on global stock markets for the first half of 2021, expats are now looking ahead to how the rest of the year will play out for their investments. With the MSCI All Country World Index registering gains of 12%, equities had their second-best performance since 1998 for the first half of this year, only being beaten by a 15% rise in 2019. The MSCI ACWI is a stock index that tracks about 3,000 stocks in 49 developed and emerging market countries, representing a total market capitalisation of tens of trillions of dollars. Delving into individual indices, we see that Wall Street’s S&P 500 has climbed more than 17% in 2021 to fresh all-time highs, while Germany’s DAX has risen 14%, London’s FTSE 100 managed to gain 10.9%, and the Shanghai Composite has added 2.2%.

Will the stock market bull run continue?

There is a consensus amongst analysts that the global gains are likely to be extended for the second half of 2021. “The continuing robust economic growth in major economies, strong corporate earnings, ultra-low interest rates, and a sleeping bond market, will all mean that investors looking for yield will keep piling into equities, topping up their portfolios to build wealth,” said deVere Group CEO Nigel Green. “There’s more than a hint of Goldilocks in the near-term.” A Goldilocks economy is not too hot or too cold but just right—to steal a line from the popular children’s story Goldilocks and the Three Bears. A Goldilocks economy has steady economic growth, preventing a recession, but not so much growth that inflation rises by too much. It’s also ideal for investing because as companies grow and generate positive earnings growth, stocks perform well. Bank of America’s head of global economic research Ethan Harris shared the deVere boss’ assessment: “This is Goldilocks for equities.” However, Harris said the real economy must show on-the-ground improvements too within several months, in regard to labour and on the supply shortages and bottlenecks. Job growth has been robust, but not as strong as expected, as employers complain about labour shortages. “It’s kind of like you have a free pass for the summer,” Harris said. “The market is accepting any number whether it’s on core inflation, wages or job openings. September is the magic month for everyone. If it doesn’t start to improve, it’s not Goldilocks anymore.”

Investment headwinds

Despite the optimistic sentiment on global stock markets expats should avoid complacency and be aware of some headwinds that could, if not careful, threaten returns on investments. There are two key things they should watch out for. First are potentially shifting policies as central banks and governments seek to scale back their unprecedented support, which has helped bolster asset prices. For example, Australia’s central bank is set to taper its bond buying programme, there’s an intensifying debate going on within the U.S. federal Reserve over when to start reducing its $120bn of asset purchases, and a Second Bank of England official has said that the time to slow stimulus may be near. Second is inflation. It remains too early to say either way whether the current creeping inflation is transient or persistent. However, the debate will trigger volatility that will characterise the second half of 2021 in global financial markets. Naturally, if inflation is, as many expect, persistent, central banks will have to start moving sooner rather than later on interest rates. Last month, Jerome Powell, the chairman of the U.S. Federal Reserve, the world’s de facto central bank, said: “We will not raise interest rates pre-emptively because we think employment is too high [or] because we fear the possible onset of inflation. Instead, we will wait for actual evidence of actual inflation or other imbalances.”

Rebalancing portfolios

Investors should also prepare for the economic cycle to transition from a recovery phase to an expansionary one. HSBC Asset Management has told investors to get ready the important shift in the macro regime in its mid-year client report. “After a period when rising investor optimism lowered perceptions of risk and re-rated risky asset classes, the outlook is now the reverse,” Joseph Little, global chief strategist at HSBC, said. In these transitory times, investors must be selective as there will be clear winners and losers. “For instance, investors are likely to be interested in returning to those stock market sectors that benefit most from low bond yields, such as tech and other growth sectors, and ‘bond proxies’ such as utilities and insurance stocks. “Meanwhile, the value sectors such as financials and industrials, seen as plays on economic recovery, are likely to have a little bit of their shine rubbed off,” noted Nigel Green.

Diversification

It’s almost universally regarded that diversification is the investor’s best weapon to sidestep risks and to be best-positioned to seize opportunities. The strategy smooths out unsystematic risk events in a portfolio, so the positive performance of some investments neutralises the negative performance of others. The benefits of diversification only work if the component parts of the portfolio are not perfectly correlated, meaning that they respond differently to market influences. Diversification should be across asset classes (for example, stocks, bonds, property, cash), sectors, currencies and geographical regions.

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