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LGT Beacon: Reflation amid signs of market excesses

February 24, 2021

Recent political events have further reaffirmed the US commitment to sustained monetary and fiscal policy largesse, which has boosted inflation and growth expectations to desirable levels. At the same time, signs of speculative excesses in some market segments and one-sidedly bullish positioning point to the risk of further occasional setbacks.

In this report, we revisit the main macro developments since the start of the year and conclude with an update on our investment strategy for the coming months. The main points can be summarized as follows:

  • While the COVID-19 pandemic is not yet over as a public health risk, its impact on the financial markets is clearly outweighed by the expansionary monetary and fiscal policies that governments have adopted around the world
  • Recent political developments in the US have made its economic policy even more credible in terms of its commitment to sustained fiscal and monetary largesse
  • Reflation hence remains the dominant theme in markets, with equities extending gains thus far this year, while long -term interest rates have started to move higher (although real interest rates remain mostly negative)
  • Finally, signs of speculative excesses in some market segments and one-sidedly positive sentiment and positioning indicators continue to suggest the markets are vulnerable to bouts of volatility and highlight the importance of downside risk management

As a result, we believe our overall tactical investment positioning, adopted at the end of last year, remains appropriate. While refraining from large increases in risk exposure for now, we focus on active rebalancing and on utilizing interim opportunities to earn additional returns.

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Note: The next edition of the LGT Beacon is scheduled for March 2021.