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Manulife InvestChoice – Q3 Market Outlook

August 2021

Quarterly Macro Outlook

It’s time to think beyond the reopening and examine factors that could drive the post-COVID-19 global economy. While many countries have only just embarked on the path toward reopening, the world’s largest economies—the United States and China—are already well on their way, with Europe and Canada following closely behind as vaccination rollouts accelerate in those countries. Indeed, the road map to reopening has been laid out, and uncertainties surrounding the virus, vaccination, and how economies might fare as they reopen have diminished substantially. Now that the global macro environment is in the last innings of the reopen/reflation narrative, what comes next?


All things considered, there are important factors that remain supportive of risk assets: Global growth is likely to be running at historically high levels throughout 2021 (and into 2022), and monetary and fiscal policy will continue to be extraordinarily accommodative. In absolute terms, most global macro indicators appear very strong; however, we believe these supportive factors will begin to diminish on a relative basis going forward, implying that we’re currently at peak macro—and the road ahead could be bumpy.


In our view, the somewhat more challenging macro environment should be able to mitigate the gradual rise in market rates, and we expect it to be less damaging to equities. Crucially, we believe sector selection, country selection, and regional focus will play a very important role in asset allocation decisions in the coming months—the ability to distinguish which elements in the macro narrative have reached peak (versus those that haven’t) could be critical to outcomes in the third and fourth quarters of 2021.

Asia's economic outlook continues to hinge on the course of the pandemic, despite the region's early successes in containment. The region is lagging in vaccine rollouts relative to the United States and Europe. In addition, the latest virus surge led to significant tightening in people movement, with South Korea and Hong Kong registering the highest rates of mobility currently, and Malaysia and India at the opposite end of the spectrum.1 The good news is that the region’s manufacturing sector hasn’t been subject to full lockdown restrictions and is holding up better relative to last March, thanks to strong foreign demand for Asian exports. Governments have also responded with more stimulus measures to support economies through lockdowns, albeit in varying degrees, thereby amplifying the unevenness of the recovery. The recent economic setback reinforces our view that interest rates will remain low across the region for some time to come. 

Fiscal spending in the United States and globally is likely to stay elevated (which explains why the five-year inflation outlook in a post-COVID-19 world is higher than before COVID-19); however, we expect the fiscal impulse is going to wane significantly in the next two years. Should this happen, it’ll translate—mathematically—into a sizable drag on growth in 2022. In our view, this should be understood as a fiscal cliff. In fact, when the expected reduction in fiscal spending is expressed as a percentage share of the expected resultant fall in fiscal deficit, it’s likely to be the largest fiscal cliff since the 1940s. Unsurprisingly, this has fueled speculation that the current growth cycle will be a very short one. While we expect a sizable drop in U.S. growth in late 2022, we certainly don’t expect a recession to materialize.

1 Our World in Data, as of May 8, 2021.

Disclaimer – Quarterly Macro Outlook

Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness or completeness and does not accept liability for any loss arising from the use hereof or the information and/or analysis contained herein. Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein.

This material was prepared solely for educational and informational purposes and does not constitute a recommendation, professional advice, an offer, solicitation or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security. Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. The economic trend analysis expressed in this material does not indicate any future investment performance result.   This material was produced by and the opinions expressed are those of Manulife Investment Management as of the date of this publication, and are subject to change based on market and other conditions. Past performance is not an indication of future results. Investment involves risk, including the loss of principal. In considering any investment, if you are in doubt on the action to be taken, you should consult professional advisers.

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This material is issued by Manulife Investment Management (Hong Kong) Limited. This material has not been reviewed by the Securities and Futures Commission (SFC).

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