Slight overweight in equities still justified
There is no playbook for how investors should navigate as the world emerges from a pandemic.
“In essence, we have been through an economic cycle on steroids, transitioning in the space of a year from decent growth to deep recession and now an economic boom. Right now, investors have to get the most out of the economic boom driven by the global reopening, but at the same time be prepared for the wave to potentially peak soon,” says Frank Øland.
More specifically, we at Danske Bank expect global equities to generate a return of -1 to +4% in the coming 12 months (in EUR).
“While this is a modest return expectation, we nevertheless assess it to justify a small overweight relative to bonds, where we see an even more limited return potential. However, we acknowledge that the risk-return ratio for equities now looks less attractive than at the start of the year,” explains the chief strategist.
Where we see the greatest return potential
Frank Øland currently sees the greatest return potential in European equities. First, because Europe still has more reopening momentum to come than, for example, the US, where the vaccine rollout is more advanced. Second, the European equity market has a larger share of cyclical equities, which typically perform best during economic upswings. These include equities from among the financial, industrial and materials sectors.
Nevertheless, Frank Øland emphasises that investors should not underestimate the significance of bonds in their portfolios.
“Bonds provide return stability for portfolios, not least during periods of turmoil, and while the economy and the financial markets are continuing to ride the reopening wave, it is sure to dip along the way,” says the chief strategist.