Markets continued to rise in Q2, supported by the effect of additional fiscal stimulus (including the $1.9trn US stimulus package) and optimism over a global economic recovery. Economic data and corporate earnings recovered strongly, driven by the re-opening of economies as vaccinations accelerated in the US and Europe in particular, but also developing economies, albeit the latter was more patchy. There were bouts of volatility centred around concerns that structurally higher inflation could result from the unprecedented levels of monetary and fiscal stimulus injected globally, linked to a more hawkish tone from the US Federal Reserve suggesting interest rate increases could come sooner than previously expected.
With vaccine roll-outs continuing and fiscal and monetary stimulus remaining strong, global economic recovery is likely to stay, albeit subject to disruption as COVID-19 cases rise in various regions. This will likely continue to support risk assets, though for many asset classes there is limited room for further price appreciation. Within credit, both investment grade and high yield spreads are at pre-pandemic tights and at close to the all-time low yield, it is difficult to envisage gains in excess of low single-digit yield (with little margin for error) and potentially losses in more interest rate sensitive areas. Equities are expensive on many metrics, but with more dispersion. With the current uncertainty around inflation and the longer-term consequences of the increase in global debt, we think it appropriate to be prudent and selective in the level of risk investors take.
We feel that hedge funds are a compelling investment in a variety of strategies; relative value strategies to generate traditional bond-like returns with limited beta to markets, equity focused managers in specific areas, or private credit to fill the avoid in credit markets with a large differential in the returns available between liquid and illiquid credit.