Developed market equities to march forward in the remainder of 2021 – CE

Economists at Capital Economics continue to expect developed market (DM) equities to gain ground in the rest of this year despite the recent turmoil in bond markets as real yields remain quite low and economic growth stays strong.

See:

• S&P 500 Index still have much further to rise for three reasons – Natixis

• S&P 500 Index: Rally to continue as the US economic recovery gains momentum – UBS

• S&P 500 Index to climb towards 4100 by end-2021 – Deutsche Bank

Key quotes 

“Our forecast is for DM government bond yields to fall back a bit this year. And even if yields were to rise further, we suspect that this would be driven mainly by rising inflation compensation, which tends to have a benign impact on equity prices. 

“We don’t expect equities to get a big boost from rising valuations as they did last year. For a start, we think real government bond yields will stabilise rather than fall back sharply. What’s more, we don’t anticipate a further big positive reassessment of economic growth. Indeed, we suspect that a lot of good news on the economy is reflected in the current level of equity prices.”

“We wouldn’t rule out some further small increases in equity valuations, especially outside the US, where they are generally lower. More importantly, we expect an increase in firms’ earnings as the economy continues to recover from the coronavirus shock to push equities higher. Indeed, we think that the lifting of most restrictions on activity in DMs as vaccinations progress, together with extremely loose monetary and fiscal policy, will cause the global economy to grow strongly this year.”

“We forecast gains of 6-18% in MSCI’s indices for major DMs in the remainder of this year. We also anticipate that the MSCI USA index will generally underperform MSCI’s indices for other DMs.”