Russell Investments: Market strategists see old new cycle in Q4 market outlook

September 30, 2020

Team prefers non-U.S. equities to U.S. equities in second stage of Covid-19 economic recovery

Russell Investments’ market strategists maintain a moderately positive medium-term outlook in their latest quarterly report, even as markets navigate near-term risks from ongoing Covid-19 concerns and the U.S. federal elections in November. The team’s cycle, value and sentiment investment decision-making process at the beginning of the fourth quarter scores global equities as slightly expensive, sentiment as neutral and the cycle as supportive. While the team sees aspects of the new cycle for the economy as already appearing decidedly late cycle in terms of valuation, they expect the early-cycle economy will trump later-cycle valuations for the next year or two.

“Overheated technology stocks and U.S. election uncertainty are near-term headwinds, but positive Covid-19 vaccine developments, dovish central banks and an ongoing economic recovery should allow equity markets to push higher,” said Andrew Pease, global head of investment strategy at Russell Investments. “We believe that the global recovery from the recession will lead to a long period of low-inflationary growth, supported by monetary and fiscal stimulus.”

Please also offers the following assessments in the team’s Q4 report:

• Prefers non-U.S. equities to U.S. equities. “The second stage of the post-coronavirus economic recovery should favour undervalued cyclical value stocks over expensive technology and growth stocks,” Pease said. “Other major markets are overweight cyclical value stocks relative to the U.S.”
• Sees value in emerging markets equities. “China’s early exit from their Covid-19 lockdown and stimulus measures should benefit emerging markets more broadly,” Pease said.
• Holds a neutral view on high yield and investment grade credit, which were very attractive in late March when spreads were wide. “Spreads have since narrowed and at this point only adequately compensate for the likely rise in default rates following the recession,” Pease said.
• Views government bonds as expensive. “Low inflation and dovish central banks should limit the rise in bond yields during the recovery from lockdowns. U.S. inflation-linked bonds offer good value with break-even inflation rates well below the U.S. Federal Reserve’s targeted rate of inflation.”
• Believes real assets offer a pandemic recovery trade. “Sentiment appears overly bearish after REITs sold off heavily in March, with investors concerned about the implications of social distancing and online shopping for shopping malls and office buildings. At this point value is positive.”
• Expects the U.S. dollar will weaken into the global economic recovery, given its counter-cyclical behaviour. “The U.S. dollar typically gains during global downturns and declines in the recovery phase,” Pease said. “The main beneficiaries should be the economically sensitive ‘commodity’ currencies, such as the Australian and Canadian dollar. Also, the euro and British sterling at this point are undervalued.”