While there have been recent setbacks with the emergence of more virulent variants of Covid-19, optimism has been building in markets over the past couple of months as the approval and roll-out of effective vaccines have allowed investors to start thinking of a post-pandemic future.
With the worst of the pandemic seemingly behind us, investors have become increasingly optimistic about the economic outlook and markets.
As Bank of America’s closely watched Global Fund Manager Survey has shown in recent months, more fund managers believe the global economy is in the early-cycle phase as opposed to recession.
Some 70 per cent of fund managers said the global economy was in the early-cycle phase than in recession (12 per cent), as the below chart shows, which has been a key recovery milestone following previous crises in 2009 and 2012.
While economic growth declined in 2020, expectations are high for a bounceback when lockdown conditions are lifted and social distancing is no longer needed as the vaccines are rolled out. 
Indeed, Matt Beesley (pictured), chief investment officer at Artemis Fund Managers, said a new economic cycle has already begun but highlighted the unusual way that the previous cycle ended.
He said: “The point is that we haven’t had an economic cycle that has been brought to an end by excessive amounts of debt or inflation or high interest rates forcing an economic slowdown.
“We’ve had a short, sharp, demand-led shock imposed upon the global economy. There hasn’t yet been that efficient cleansing of excess capacity that typically happens in a recession.”
The Artemis investment chief said the growth outlook for 2021 was “essentially positive” although valuations in many asset classes were relatively elevated.
“You probably need to believe that earnings are going to grow next year by more than what’s currently priced-in,” he said.
“If you look at the global equities divided by sector, in mores cases they are trading at historical highs, therefore for those sectors or markets in aggregate to perform well you need an earnings surprise to come through.
“Now that could happen, but if there was a key lesson from 2008-2010 it was that those companies that cut costs quickest and hardest tended to have more earnings leverage than they realised.
“Without that, equity markets are probably expensive and bond markets are expensive. But we have an unnatural buyer in bond markets [in the form of central banks], which is helpful.”
Ed Smith, head of asset allocation research at Rathbones, also believes a new cycle has started but that the early stages have been compressed in a short space of time as vaccines caused to markets rally towards the end of last year.
He explained: “We’ve already seen the sort of higher-beta, higher-risk parts of the market – apart from value – outperform pretty substantially.
“Pretty much all of the outperformance that you’d expect to see in the recovery phase of the business cycle, [that] usually takes at least a year, has already been observed.”
Smith said one of the signs a new cycle had begun was that there is still a very stimulative monetary and fiscal policy environment with most countries around the world focused on tackling the economic impact of the coronavirus crisis.
And this has led to a subtle shift in markets towards more cyclical stocks away from more defensive areas, said the asset allocation specialist, but not all areas are benefiting.
“We are still pretty suspect on a rotation into deep value,” he explained. “Value, when it outperforms, tends to correlate with other higher risk-on factors but it hasn’t done so far.
“If we look at the last three big, lasting rotations into value in 2009, 2012 and 2016, they all started after a big fall in equity markets after credit spreads widened out and after a fall in the PMI surveys.
“None of these things have happened in the last couple of months.”
Performance of style indices over 3mths
Source: FE Analytics
As such, Smith said the rotation into value seen towards the end of last year is unlikely to be sustainable in the longer term, particularly given the types of stocks that are found in the value buckets.
Sectors such as energy, financials, materials are “the parts of the market that haven’t really returned anything to shareholders via stock market prices or retained earnings for the last 10 years”, said Smith.
“That’s due to structural reasons that predate Covid and are likely to continue for the next 10 years, such as a flatter yield curve for financials or constrained oil prices for energy,” he added.
“It’s important to bear in mind sector exposure to value, but we think other risk factors are likely to continue to outperform as we start 2022.”
However, Mazars chief economist George Lagarias (pictured) said it’s not as simple as talking about one cycle, as there are two cycles that have uncoupled since the start of the pandemic that investors need to be aware of. 
He said: “The problem is that there were usually two cycles running: there was the financial cycle, and then there was the economic cycle. And, it was usually the financial cycle that runs slightly ahead of the economic cycle.”
Lagarias said that at the time of the global financial crisis of 2008, the economy had been doing very well until the crisis began and financial markets collapsed.
“This time around, whereas the economic cycle has clearly been disrupted in the worst downturn since the second world war, the financial cycle is actually [still] going on,” he said. “It recovered from a five standard deviation event; the probability for recovering from a five standard deviation event is 0.0000-something [per cent]. It’s extremely small.”
What has happened since the pandemic began, said the Mazars chief economist, is that a ‘command stock market’ has emerged where money is being printed by central banks and given to the stock market by investors of all stripes to invest without fear.
“It’s not that we have ignored the rules and the unthinkable has happened -it’s that we pretty much compelled the financial cycle not to follow the economic cycle,” he said. “So, now we’re looking at different cycles altogether.”