We were delighted to host our Markets Outlook Webinar, last Wednesday with Head of Fixed Income Strategy and Sales, Ryan McGrath, Chief Investment Officer, David Beaton and Senior Research Analyst, Ian Hunter. The event was hosted by broadcaster and columnist, Ian Guider, who has written an analysis of the event:
It’s approaching 18 months since Covid-19 arrived on these shores. The cost, in both health and economic terms, has been severe. The initial reaction of stock markets, with record declines in February and early March 2020, reflected the fear that the pandemic would result in a prolonged economic slump. However, now approaching summer there are grounds to feel optimistic that the economic fallout of Covid-19, harsh as it has been for some specific areas such as hospitality, will be countered by a strong economic rebound. The Economic & Social Research Institute (ESRI) has forecast double-digit expansion of the Irish economy in 2021, much stronger than the growth outlook for the US, the UK and the eurozone.
The outlook for the Irish and global economy and how investors can ready themselves to benefit from it, was the subject of a recent event I chaired with a number of Cantor Fitzgerald analysts. The title of the event – “Positioned for Growth” – reflects the fact that the world is a much different place than it was, even at the beginning of the year. We discussed the nature of the recovery and how investors can play it, the potential for interest rate increases and the shift to sustainable investments.
What has moved us into a position of optimism, in marked contrast to the last major recession in the aftermath of the 2008 global financial crisis, has been the response by governments and central banks to stave off the worst economic effects of the pandemic.
“It’s all about underlying policy measures from monetary policy and fiscal policy,” David Beaton, Chief Investment Officer at Cantor Fitzgerald says. “We’d be confident and optimistic about the outlook for the global economy. The main thing is the vaccine rollout.”
Central banks have kept the tap of cheap money running, allowing governments to borrow at low interest rates. That has allowed states to prop up the incomes of temporarily laid off employees and assist companies weathering the crisis. As the vaccine deployment gathers pace across Ireland and Europe, the accumulated savings from those whose incomes were least affected, are there to be unleashed when lockdown restrictions ease.
“Vaccine rollout is now economic policy. We can see those countries like the US and UK slightly ahead in their recovery. We’ve heard there is €15 billion of cash on deposit from the Central Bank here. There’s a lot of pent-up demand there. We’re on the cusp of a strong recovery,” Ryan McGrath, Head of Fixed Income at Cantor Fitzgerald, believes.
Markets have gained much ground since last spring, anticipating much of the recovery. In the US, stock markets are at or close to their all-time highs. European markets too have risen in advance of an expected return to growth later in 2021. Beaton said this reflects the sharp rise in company earnings.
“We’ve seen in [the first quarter] this year 51% earning growth out of the S&P 500 [companies]. Now these are year-on-year comparisons, but nonetheless it’s very strong and we’re expecting 64% growth in earnings in the second quarter reporting season.”
If there are any dark clouds on the horizon on the economic front, it has been that the wall of money thrown at the pandemic has brought with it the spectre of inflation. Anyone going for a haircut, a meal or buying a used car will have noticed prices have begun to tick higher. In May, US consumer prices rose 5%, the fastest increase since August 2008. In the eurozone, inflation in May was 2%, the highest level in over three years. It is prompting fears that central bank policy makers will have to act to counter rapid inflation.
So far, though, the response of central banks has been to allow prices move higher so as not to choke off any recovery and a recognition that some of the increases may be temporary in nature to reflect the reopening. But will they sit by and let inflation run well ahead of their targets?
“What we are not seeing is any wage-based inflation. When you look at the unemployment level there is going to be slack in unemployment as we come out [of lockdown] and with that slack there will be less wage-based pressure. Is inflation transitory? I’m going down on the transitory side. Back when [quantitative easing] was first introduced people first thought it would be accompanied by inflation. There is a fear out there that with all this money floating around inflation will start to tick higher,” McGrath says.
If markets have priced in some of the expected recovery and investors are looking for different opportunities to generate returns from the global shift towards a more sustainable future. Covid-19 has overshadowed the leap by investors to environmental, social and governance (ESG) investing.
ESG investing, according to Beaton, extends far beyond companies looking to burnish their carbon-neutral credentials and investing in renewable energy and it doesn’t have to come at the expense of generating higher returns.
He points to the track record of Cantor Fitzgerald’s Green Effects Fund, which is now in its 20th year and invests in a basket of stocks in different sectors with an ESG focus, such as alternative energy, sustainable transport, food, energy and other ethically screened companies. The fund returned 45% in 2020 and has a minimum investment of €5,000. He added that for investors seeking some security, Cantor Fitzgerald has an ESG version of its 85% Progressive Protection Bond, which requires a minimum €10,000 investment.
“There are a number of equity-based exchange-traded funds that would fit into a client portfolio that has a focus or preference for ESG investing” Beaton says. “Over the last year we’ve seen a lot of those companies outperform as the mandates from big pension and investment funds shift toward an ESG focus.”
After a rollercoaster in 2020 and the winter setbacks we look poised – assuming the smooth and swift rollout of vaccines and no dangerous variants emerge – to recover strongly from the pandemic. Investors who have kept their nerve have enjoyed strong returns. As we move into recovery mode and look to the future it’s time for more optimism than we might have expected.
Ian Guider is a columnist and writer with The Business Post.
Contact details for each individual Cantor Fitzgerald team member can be accessed here on our website should you wish to speak with a Portfolio Manager or Account Executive.