MFM Asset AllocationAdagio

Economic recovery will continue to be uneven across regions and sectors as Covid-19 variants spread. It will be essential to quantify the impact of the new restrictions on the service economy. Once the pandemic is contained, the economic cycle will enter a second phase marked by moderate but more synchronized growth. In the financial markets, wage growth will be one of the most scrutinized indicators. Indeed, if wages are growing on a sustained basis, investors are likely to question the transitory nature of inflation. In the shorter term, the continued regulatory crackdown in China will have a notable impact. Policymakers seem to have chosen an inopportune moment to scare Chinese and international investors by reminding them that Chinese capitalism is primarily state-owned.
The combination of the sudden drop in interest rates with the increase in expected corporate profits for the next few quarters has caused our "World Equity Risk Premium" indicator to rise sharply. It means that it is more relevant to invest in equities, more generally in growth assets, than in bonds. The economic recovery coupled with the determination of central bankers to maintain monetary support also argues for moderate risk-taking. In conclusion, in an environment of high valuations for most asset classes, it is essential to remain humble in terms of expected returns to avoid taking disproportionate risks. Similarly, patience and optimal diversification should allow benefiting from potential market opportunities.