Global Market Perspective Q4 2021: economic and asset allocation views
The risk of stagflation is the dominant theme in our economic views, but what does this mean for asset allocation?
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After several quarters of strong gains, global equities ended the third quarter on a rather flat note.
Equities certainly had a promising start thanks to a robust earnings season. But markets had to contend with global growth concerns over the spread of the delta variant and the prospect of policy tightening by the US Federal Reserve (Fed), as inflation rose sharply.
In addition, increased regulatory oversight by the Chinese authorities and uncertainty over the US debt ceiling dampened investors’ sentiment in September.
Instead, commodities outshone equities, but performance was more modest versus the stellar returns over the first half of the year.
Meanwhile, both the returns of government and investment grade credit bonds moved side-ways over the period.
We remain optimistic on the global growth outlook as activity should continue to pick up with the re-opening of the world economy. While our global growth forecasts have stayed unchanged, we are raising our inflation projections. This is in response to the strength of the rebound in demand, which has stretched supply chains resulting in higher prices.
Overall, the outlook has moved in a stagflationary direction.
The principal risk to our central macroeconomic view is that the world economy remains constrained by shortages of labour and components. This outcome is captured by our ‘supply side inflation’ scenario where inflation is higher than in the base case, while growth is weaker.
From an asset allocation perspective, we are still positive on equities and commodities, but underweight on government and corporate bonds. We expect equities to be supported by robust earnings growth which will more than offset the impact of higher bond yields.
Policy tightening by the central banks, particularly the Fed, should provide a catalyst for higher yields and underscores our negative duration view.
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