Highlights:

• Now comes the hard part. Global markets have staged a spectacular rebound from last year’s pandemic trough. The economic rebound is flattening out,  while governments and central banks are starting to pare back exceptional policy support.  
• The post-emergency world leaves investors in a bind: high valuations cap expected returns,  while inflation threatens to erode the real value of assets.
• TINA is not dead: There Is No Alternative to equities in the universe of liquid assets. Cash will render moderately negative real returns for longer. And government bonds will suffer from duration exposure as yields “normalise” (a bit) higher.          
• Credit will offer resilience, but has lost much of its shine, following the sharp compression  of risk premia over the past year. The modest carry is unlikely to offset the headwinds from rising  rates and modestly widening spreads. In fixed income, only EM bonds may yield nominal returns that  almost compensate for inflation. 
• The case for equities remains intact in this bleak set of alternatives. Equity risk premia are  still decent, especially in Europe, and earnings still have upside as the recovery proceeds. 
• Yet delivering performance through beta will get ever harder; alpha becomes more important.
• So does hedging, given the lofty valuation and deteriorating diversification benefits.  
• Inflation and the pandemic (aggressive mutations) are the largest downside risks. Much of the  recent price overshoots seems transitory, but structural factors may well prevent a quick pullback.  Inflation is toxic in a least three ways: it eats into both corporate margins and the consumer  purchasing power and may require a faster monetary policy tightening. 

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