(London) Aviva Investors, the global asset management business of Aviva plc, expects a rapid and broad-based recovery from the COVID pandemic in the rest of 2021 and in 2022.
Global growth should exceed 7% this year and around 4.5% next, with risks assessed to be on the upside for both. The virus will remain with us for some time, but the worst disruption from lockdowns is over, vaccination efforts are well advanced, people and companies have adapted well, and policy support has remained in place.
Re-opening of economies has led to a sharp revival in demand and supply has struggled to keep up, leading to frictional bottlenecks that have resulted in the emergence of some inflationary pressures. Much of this is expected to be transitory, but underlying inflation will probably be a little higher than just before COVID struck.
Monetary policy is therefore expected to remain supportive throughout the rest of the year and next, with recent changes in approach to meeting their inflation objective allowing central banks to keep policy looser for longer. Emergency levels of fiscal support will be steadily withdrawn as economies re-open, but more activist government spending initiatives are set to increase, especially in the US, with the green and digital agendas likely to be key elements
Michael Grady, Head of Investment Strategy and Chief Economist at Aviva Investors, said:
“Our constructive view on a reflationary outlook, alongside ongoing policy support, leads us to prefer to be overweight equities, with a bias to the US and UK. This is balanced by an underweight in emerging markets which may face headwinds from higher US bond yields, weaker local currencies and tighter domestic monetary policy.
“We expect the growth and inflation outlook to put some upward pressure on long-term sovereign bond yields, with the Fed in the US sticking to its new average inflation targeting regime. As such, we prefer to be somewhat underweight duration, mainly through US treasuries.
“The upside from tighter credit spreads appears to be limited, given the narrowing already seen, so we prefer to be slightly underweight investment grade and neutral high yield. Overall, we have a neutral view on currencies.”