The rotation from growth into value seems to have intensified this week as sovereign yields rose. Investors appear to be positioning for an acceleration in the recovery, which may come with higher inflation. This could potentially lead to the withdrawal of generous monetary and fiscal stimulus efforts. We believe there is scope for global sovereign yields to rise further and have analysed how global equity sectors have behaved in similar periods.
We think the rally in risk assets since March 2020 was mainly driven by generous fiscal and monetary support, which allowed markets to look through the pandemic-induced economic slump. However, this risk-on move has hit speedbumps this year. We suspect investors have started to process what the levelling off and withdrawal of that support would mean for their portfolios.
If current trends of falling Covid-19 cases, hospitalisations and deaths are maintained, it would allow for a re-opening of more economies. Also, as vaccination programmes reach more people around the world, this will reduce the severity and spread of the virus in the future. In our view, it will be a while before humanity has enough protection against the virus to restore pre-pandemic normality, but we do not expect stimulus efforts to be extended much further.
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