Global Market Perspective
Economic and asset allocation views covering Q2 2016. This includes our global growth update, 30-year return forecasts, and our research note assessing the risk of a US recession.
20 April 2016
Markets endure roller-coaster ride
Financial markets had a roller-coaster experience in the first quarter, with sharp falls in January being followed by a rally which left investors close to where they had started by the end of March.
The moves closely tracked oil prices and the Chinese yuan (CNY) as investors weighed the odds of a global recession. Our forecasts, backed up by our key indicators (see the research note), suggested that such fears were overdone and that the world economy would avoid such an outcome.
However, it also took action by the major central banks to help investors regain their risk appetite. In particular, the Federal Reserve (Fed) signaled that rates in the US would remain lower for longer and in doing so brought a halt to the US dollar’s remorseless appreciation.
Although markets ended the quarter on a better note, the outlook remains difficult. Prospects for global GDP growth remain tepid and consequently corporate earnings growth is likely to remain lackluster.
We would also note that should we see a significant strengthening of activity, the prospects for a Fed rate rise are likely to increase significantly.
Trouble with the cycle
In this respect, markets face a typical late cycle problem where central banks will be looking to tighten on signs of an acceleration in growth.
Whilst we are some way from this in the eurozone and Japan, the US - and to some extent the UK - are ahead in the cycle and their central banks are likely to move in this direction over the next 12 months.
Consequently, there is a slightly more defensive tone to our asset allocation this quarter by, for example, being neutral equity and favoring the US equity market over the higher beta Europe ex-UK. Credit is a preferred area, where we believe high yield bonds are attractive on our central view.
Meanwhile, investors will continue to seek pockets of value and we have included our 30-year returns to help identify the areas which offer the best potential for long run returns.
Important Information: The views and opinions contained herein are those of Schroders’ Investment team, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. UK: Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA, is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. Further information about Schroders can be found at www.schroders.com US: Schroder Investment Management North America Inc. is an indirect wholly owned subsidiary of Schroders plc, a SEC registered investment adviser and is registered in Canada in the capacity of Portfolio Manager with the Securities Commission in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan providing asset management products and services to clients in Canada. 875 Third Avenue, New York, NY, 10022, (212) 641-3800. www.schroders.com/us