Our asset allocation

Traditional asset classes

Fixed income: yields to go higher

Concerns about global growth have helped keep both U.S. Treasury and German Bund yields at extremely low levels. But policy divergence will soon start to have an impact. U.S. yields are likely to move higher earlier, as the Fed ends quantitative easing and markets contemplate a future rate hike, most likely in the second half of 2015. In contrast, the ECB will try to hold down rates as it explores different ways to kick-start European growth. Against this background, investment-grade credit may appeal and there could be some opportunities in high yield. In the emerging markets , selection remains key.

Equities: different worlds

Growth concerns have also pushed down equities recently, but we think that there are still good reasons to like this asset class. In the United States, earnings growth is likely to continue, helping to ease the market back up again. In Europe, earnings growth has been less evident, against a very subdued economic background. But a weakening euro will help Eurozone corporates and we expect price gains on a 12-month horizon. Japanese corporates will similarly benefit from a weaker yen, although concerns remain about the impact of declining real wages. Within the emerging markets, we remain selective with a preference for Asia ex-Japan. Overall, we continue to favor cyclicals over defensives.

Commodities: still struggling

Structural and currency factors keep us cautious on commodities. The U.S. energy renaissance is adding to oil supply, while slow rates of global economic growth are putting the brakes on total demand. The reshaping of the Chinese economic model away from heavy industry will also limit growth in demand for many commodities. U.S. dollar strength will add to downward pressure on U.S.-dollar-denominated commodity prices.