Source: Unigestion, Bloomberg, as of 5 July 2021.
While sentiment and risk appetite have inevitably been lifted by the recent benign macro backdrop, the key is to assess if asset prices are in line with the current context and account for certain risks, or if there is a disconnect between the two: the roots of complacency and “irrational” exuberance.
Our view is that sentiment has peaked with macro expectations, but is now showing signs of complacency toward the risks lying ahead. Looking at equities, the joint forces of strong earnings and ample central bank liquidity legitimates current record levels, where valuations remain relatively contained by very low interest rates. However, earnings expectations for 2022 onward have now cooled in line with the expected slowdown in GDP growth. Have markets done enough to acknowledge this?
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