Investment Commentary

Provided by Mercer - CERS Investment Adviser

Market Developments

Risk assets continued to move higher in April. Unprecedented global fiscal stimulus and the vaccine rollout continues to suggest a sharp acceleration in global growth over the next few quarters.US interest rates declined slightly following the sharp increases during the first quarter.

As we moved through April, a slightly more positive picture has emerged on the economic outlook. Even though COVID uncertainty remains high and restrictions remain in many countries with India,Japan and parts of continental Europe re imposing lockdown measures in April, vaccine rollouts in a number of large developed economies kept up optimism over sustained reopening’s later in the year. Leading economic indicators such as purchasing manager indicesshow that a recovery is well underway. The US added fuel to this recovery fire in March with another large $1.9 trillion fiscal stimulus program while an even larger infrastructure program is being discussed. Central banks in developed markets remain committedto a continuation of easy monetary conditions. Only the Bank of Canada took tentative steps in April to tighten monetary conditions by announcing the tapering of asset purchases.

Equity markets have been reflecting this manic depressive environment with a weak January, followed by solid gains from February through April. As markets continue to coalesce around the reopeningscenario, value stocks have been outperforming growth stocks by wide margins in February and March as these are the stocks expected to benefit from a return to normal social interactions, but momentum shifted back to growth stocks in April. Emerging marketswere strong to enter the year but have been falling behind since February when Chinese markets began to reflect concerns over tighter credit and a regulatory pushback against its tech sector. Brazil and India underperformed in March and April respectivelyas they became new epicenters of the Covid-19 pandemic.

Bond markets have priced in stronger growth and inflation risk. Longer dated nominal yields have been increasing and yield curves have been steepening globally for the year, most notably for theUS where this trend has continued through to March, but pressure on yields eased in April.

Cyclical commodities performed strongly over the year to April, especially energy in anticipation of the strong pent-up demand the global rebound is bringing. Supply chains were already stretchedgoing into 2021 which was exacerbated further by severe winter weather in February and the temporary closure of the Suez Canal in March. The ongoing semiconductor shortage continued to cripple car manufacturing in April.

Outlook

Our medium term macro outlook remains positive. Vaccine have been rolled at a much faster pace than anyone would have anticipated in the US and UK. The EU has also been catching up lately aftera less than auspicious start. In combination with natural immunity acquired in the latest COVID-19 waves, a large part of the developed world is expected to achieve herd immunity by early summer. Even if the majority of emerging markets are far behind thecurve with vaccinations, China and most other Asian nations have been able to effectively manage the disease without vaccine and only limited restrictions.

Full re-openings are expected to unleash a mini boom in the summer as pent-up demand is released and savings are spent. Even if households do not draw down all their accumulated savings, the merereturn of the high saving rate to its long- term mean would be highly stimulatory in itself. Forward-looking indicators such as purchasing manager indices are already at their highest levels in decades whilst labour markets are showing signs of a strong jobrecovery, most notably in the US.

Monetary and fiscal policy is set to remain accommodative and policy-makers remain committed to step in to keep economies afloat and markets stable in case of temporary setbacks. This continuesto limit the downside for risk assets and justifies further compression of the risk premia. The latest $1.9 trillion stimulus package in the US has added fuel to the fire. Even beyond immediate stimulus, fiscal policy is set to remain expansive. The proposedUS infrastructure package of close to $3 trillion would lead to a boom in government investment. It could mark the onset of a ‘high pressure’ economy with governments spending aggressively to generate high rates of economic growth.

For companies, this means strong earnings growth from a low basis in an early cycle environment this year which is most beneficial for equities. At the same time, the unusual constellation oflose monetary policy and strong economic growth has increased inflation expectations and put pressure on bond yields. This creates an adverse environment for duration assets.

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