We are backing commodities and equities, and are conscious that the global economic recovery could be even sharper than we expect.
Investors welcomed 2021 with a more positive outlook on the world economy.
The roll-out of the Covid-19 vaccine and substantial policy support continued to aid the rally in risk assets. Commodities shone brightly, lifted by hopes of a return to economic normality. Meanwhile, the more cyclical and value-orientated stock markets of Europe and Japan outperformed.
Equity returns in emerging markets were more modest, given the stronger US dollar on the back of significant US fiscal stimulus. This also helped drive government bond yields higher, which led to a sell-off in developed sovereign and US credit bonds.
We have continued to upgrade our global growth forecasts, with the main increase seen in 2022 as the world returns more fully to normality.
For 2021, our global growth outlook is little changed as upgrades are overshadowed by a significant cut to our eurozone forecast. Against this backdrop, the increase to our inflation forecast this year is largely driven by higher commodity prices.
The impact is expected to be temporary, which allows central banks to keep monetary policy loose.
In terms of the greatest risk to our central macroeconomic view, this would be a ‘Sharp global recovery’. This scenario is based on a faster and wider vaccine delivery, less economic scarring and greater fiscal impact than in the baseline.
From an asset allocation perspective, we are still overweight in our allocation to commodities, which offers some protection from cost-driven inflation.
We remain positive on equities, but negative on government bonds and high yield credit. We recognise that equity valuations are no longer as compelling with the rise in bond yields. But higher bond yields have been a response to stronger growth, which is a more supportive backdrop for stocks. Moreover, we have a preference to the areas of the market that are less duration sensitive such as Japan and value sectors.
The full Global Market Perspective is available below as a PDF.
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