It has been a cracking start to 2021 for investors, but eeking out gains in the second half of the year may be tougher.
- The MSCI World is currently showing double-digit gains for the year to date
- Markets has been fuelled by turbo-charged earnings announcements and an impressive economic recovery
- While the economic backdrop is likely to remain supportive, markets face more headwinds in the second half of the year
As we reach the mid-way point for 2021, investors can look back fondly on the first half of the year. The MSCI World is currently showing double-digit gains for the year to date, its second best performance since 1998. However, there is a question over whether it can sustain this momentum in the second half of the year – certainly, it is likely to be more complicated.
The strong performance from markets has been fuelled by some turbo-charged earnings announcements and an impressive economic recovery. A combination of pent-up demand, the reopening trade and fiscal stimulus has boosted corporate performance.
However, the easy money may have been made. Valuations are now more demanding. Value stocks look more expensive and growth stocks don’t yet look cheap. There are some areas that appear to have fallen through the cracks – income strategies, for example - but they are increasingly rare.
There could be more discussion of central bank policy over the next six months. For some time, central bankers have dismissed inflationary threats as transitory, but they may be forced into action should higher inflation persist. China is already starting to withdraw credit from the economy, which may dent the global recovery. Asset prices have been significantly supported by central bank action and any hint that it could be withdrawn could disrupt markets.
That said, there are still supportive factors. The equity market continues to look like a significantly better option for income investors and that should support certain stocks. Dividends are coming back as corporate earnings recover, which should encourage investors into the market.
Equally, the economic backdrop is likely to remain supportive. While the momentum behind the recovery may ebb a little, the world is likely to remain firmly in recovery mode. There is still plenty of fiscal stimulus working its way through the system, particularly in Europe. Key industries such as travel remain on their knees and any lifting of restrictions could boost the sector and will be reflected in economic data.
For the time being, short of a vaccine-resistant Covid variant, there is relatively little to derail markets. However, it is difficult to see the second half of the year proving as strong as the first. Gains are likely to be harder won from here.
