Expensive settings, despite the good ambiance.
The global economy is currently experiencing a recovery, providing a favorable environment for risk assets. This recovery is particularly beneficial for Japan's export-oriented manufacturing sector, as well as the Eurozone, which is poised for a strong recovery.
From a tactical perspective, equities are currently overweighted while fixed-income securities are underweighted. This trend is evident in the performance of emerging market bonds, which have overweight positions due to current spread levels offering an appropriate compensation. Abundant global liquidity, relatively attractive valuations, and growth differentials are driving the performance of emerging markets.
The US economy, which grew by 6.4 percent in the first half of 2021, is expected to continue its growth in the second half of the year. The growth in employment is a significant factor driving this expected continued growth. However, the temporary increase in inflation remains the main challenge in the US economy. The US Federal Reserve, led by Jerome Powell, has signaled an increased likelihood of an earlier start to its interest rate hiking cycle, but not before 2023.
In Europe, the European Parliament has ratified the EU Recovery Fund worth 750 billion euros. The fund aims to support the recovery in countries most affected by the pandemic by facilitating public investments. Despite a recent increase in inflation in the Eurozone, it is expected to fall below the ECB's target in 2022.
Japan's economy is also expected to have a promising outlook for the second half of 2021. This optimism is driven by the rapid increase in the country's vaccination rates. The current economic recovery, combined with both monetary and fiscal policies, continues to support economic growth in Japan.
Emerging markets are generally optimistic due to growth trends in developed countries and stable core yields. Countercyclical policy, combined with unprecedented monetary and fiscal policy, is expected to support the global recovery of emerging markets. Global inflation concerns are waning, which could lead to improved terms of trade and a promising medium-term growth outlook for emerging markets.
The private sector's demand is driving the growth in the US economy. This growth, along with the global economic recovery, is beneficial for Japan's export-oriented manufacturing sector and the Eurozone economy. The EU Recovery Fund, once fully implemented, is expected to further support the recovery in countries most affected by the pandemic.
In conclusion, the global economic recovery is a positive development for many economies, particularly emerging markets and Japan. The trends in equities and bond markets, as well as the growth in the US and Eurozone economies, suggest a promising outlook for the second half of 2021 and beyond.
