Emerging from the winter of discontent

For investment professionals only

Quarterly economic and market outlook

Key points:

  • As we move through the second quarter of 2021, over a year since ‘the great lockdowns’ began across regions, the global economic recovery continues, though signs of increased divergences are strengthening. Economic damage was less severe than expected following the winter surge in virus cases in many regions. Effective vaccine roll-outs will be critical in the next phase of the pandemic, but the Covid-19 story is far from over yet, as variants start to become increasingly problematic.
  •  The role of central banks and monetary policy remains important, but fiscal policy has taken centre-stage, and will dominate the macroeconomic and market outlook over the coming years.
  •  Looking ahead through Q2 and beyond, we see the broad reflation story moving closer to a reality as economic reopening approaches across major economies.
  •  In the US, unprecedented fiscal policy and questions around stimulus funding via taxation shape the outlook, against a backdrop of strong consumer savings and the impact of their deployment as reopening begins.
  •  In Europe, slower vaccine roll-outs to date challenge economic reopening, although the vaccine campaign looks to have accelerated as of late. Fiscal stimulus will be a key factor in European economic outcomes in the coming months as monetary policy remains very easy.
  •  China’s story is panning out differently versus other major economies, where a relatively less severe economic outcome from the pandemic so far has led to a modest slowdown in Q1 this year. We expect China’s policy stance to turn moderately more hawkish as authorities return their attention to controlled deleveraging and rebalancing from quantity to quality of growth. We are monitoring the case of a major onshore asset management company (AMC) getting into trouble closely.
  •  Overall, market volatility has picked up, with ‘mini tantrums’ testing central bank credibility, and asset classes continuing to price in the expected reflation narrative. Valuations are stretched in certain areas, looking almost late-cycle in some cases, and style rotations are starting to embed themselves. In this context, Fidelity Solutions & Multi Asset remains broadly pro-risk for now, but is taking a highly selective approach to asset allocation in the context of the evolving market and macroeconomic backdrop.

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