Take global equities. Earlier in the year, we argued that markets were over-reacting to U.S. recession fears. In February, we called for increasing equity positions. Although we remain constructive for risky assets over a longer time horizon, now seems to be a good time to start to reverse this call, step by step. Successful investing during a sideways pattern means not just buying the dips, but also taking some profits when markets recover.
This is in line with our revised 12-month macroeconomic and market forecasts, which are set out in detail later in this publication. As you can see, we remain broadly positive on the global economy. U.S. growth will be lower than previously forecast in 2016, but the worst may soon be behind us. Japan and the Eurozone look set to continue their modest recoveries. A sharp slowdown in Chinese growth is likely to be avoided. All this will keep the global economy moving forward, if in rather a low gear.
Our views on asset classes have been modified, however. After a good few years – helped, of course, by extremely accommodative monetary policy – equity markets now offer more limited upside. We expect a continued upwards trend, but this will be modest in scope and accompanied by periods of volatility.
Fixed income may fare relatively better. In fact, after the extended equity-market rally, it makes sense to take a closer look at some fixed-income sectors when you risk-adjust our return forecasts. U.S. investment-grade corporate debt and euro high-yield debt should both continue to do relatively well. Emerging-market debt may also be worth monitoring, on a country-by-country basis.
What does this mean for a multi-asset investor? Last month, I suggested focusing on 4 “Cs” – crude oil, credit markets, China and central banks. Over the past month, we have seen progress on crude oil and credit markets and rather better news on China. But it would be difficult to claim that any of these issues are fully resolved. In particular, markets still have to refine their rather confused and uncertain views on the fourth issue, central banks, as their reaction to recent policy initiatives has showed.
I think that it is also important to remember that we are now very late in the financial (if not seasonal) cycle and, typically, this is a period when markets can hold many surprises. Asset-class correlations have already started to reduce in recent months, and new patterns are likely to evolve as the investment environment evolves. These are good reasons to remain flexible and proactive on portfolio composition and risk management.