Economic and asset allocation views covering Q3 2014
15 July 2014
After a testing start to the year, risk assets rebounded in the second quarter with the US equity market making new highs. Underpinning this were signs of better economic activity in the US and continuing recovery in Europe, whilst China began to show signs of stability. The sense that central banks were becoming less supportive of economic activity dissipated and then reversed as the European Central Bank (ECB) announced a range of measures to support growth and head off deflation. Meanwhile, Federal Reserve (Fed) chair, Janet Yellen emphasised that US interest rates would remain low well into the future, even as the economy recovered.
The environment remains positive for markets in the second half of the year. However, as valuations push higher we are examining our stance on risk assets. Equities continue to look attractive, but we see scope for some profit taking and a rotation towards those markets which have lagged the rally.
Against this backdrop the decision to focus our risk budget on equity markets has proven correct, but we have also seen strength in credit, emerging market debt and peripheral European sovereign bonds. Carry trades are coming back and there has been a rally in the fragile 5 currencies. Encouraged by central bank commitment to easy policy and the low level of volatility, investors have resumed their search for yield.
Going forward we see continued recovery in the world economy and are looking for growth in the developed world to gradually spread to the emerging markets through stronger trade. However, alongside this positive development we also anticipate upward pressure on US rates as the labour market continues to tighten and inflationary pressures build. Corporate profits may than come under pressure as wages pick up. Market reaction will depend on how the Fed responds and we see a strong case for the higher interest rates in the US (see Strategy note). Elsewhere though, monetary policy is expected to remain easy with the ECB and Bank of Japan looking to stimulate growth and head off deflation.
Notwithstanding these challenges, the environment remains positive for markets in the second half of the year. However, as valuations push higher we are examining our stance on risk assets. Equities continue to look attractive, but we see scope for some profit taking and a rotation towards those markets which have lagged the rally.
Keith Wade, Chief Economist and Strategist, Schroders
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