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Back to the future

Last spring’s free-falling economies and almost total uncertainty about the effects of the COVID-19 pandemic have been replaced by a clear recovery, driven largely by uniquely massive stimulus measures. We can thus once again lift our gaze from acute problems and look forward to a future that we believe will be dominated by further recovery, continued stimulus packages and extremely low interest rates and bond yields. 

Prolonged recovery will dominate the world economy

After their abrupt halt last winter and early spring, economies around the world are slowly reverting to normality. Their recovery will continue during the next couple of years. Growth will be faster than historical averages, but because of this year’s deep slump in the growth curve and lingering problems including heightened unemployment, it will take time before economies catch up with their earlier growth trends.

Political leaders and central bankers need to continue providing stimulus

The recovery is shifting the economic policy conversation away from acute crisis responses towards the question of what long-term fiscal stimulus programmes are needed to help sustain growth. The absence of such aid packages, or insufficiently large ones, will risk creating disappointment among hopeful investors. Central bank stimulus measures are likely to continue, however, ensuring good liquidity and low interest rates for even longer than envisioned in earlier forecasts.

High share valuations may be justified if growth holds up

Today’s share price valuations, measured as price/earnings ratios, are the highest since the IT (dotcom) bubble of 20 years ago. Lower interest rates and bond yields, resulting in lower return requirements, are one important explanation. The successes of such “digital dragons” as Amazon and Google are another explanation – these companies are driving both earnings growth and valuations in stock markets. If growth forecasts prove correct and if the digital transition of our societies continues, this suggests that high valuations are defensible. Looking ahead, we expect continued low interest rates and yields − along with a slow return to more normal economic growth trends − to provide support to stock markets. We thus still have an optimistic view of risk assets such as equities, and we are maintaining our hypothesis that stock market downturns should be regarded as buying opportunities.

Returns on corporate bonds have climbed sharply since last March's price decline and have greatly exceeded our expectations. Their future potential is thus not as strong as before, but we are still positive towards owning corporate bonds, especially those with a sustainable focus.

Looking at sustainable energy and ageing

The first theme article in the September issue of Investment Outlook is a continuation of our earlier exploration of developments in the important field of sustainability, especially sustainable energy. This time we describe the promise of solutions to environmental challenges offered by the future use of “green” hydrogen. Our second theme article studies the effects on the economy and consumption of the fact that on average, we humans are getting older and older.

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