It was a quarter for emerging markets and commodities, as a combination of robust economic recovery and low inflation drove the outperformance in these assets. The trend was helped by a weak US dollar with investors responding to signs of strength in activity outside the US, particularly in the eurozone.
Overall, risk assets performed well, although sovereign bonds had done well until the last month of the quarter when a more hawkish tilt from the US Federal Reserve (Fed) caused yields to rise.
Our asset allocation remains biased toward equities and emerging markets and we are generally short duration in our bond portfolios. This is largely based on a continuation of the “goldilocks” macro environment where growth is healthy, but not too strong to trigger inflation. Interest rates are likely to rise further in the US but we believe that the Fed will proceed cautiously and not reach the levels projected in its famous dot-plot of rate forecasts.
On a more cautious note, we do see the liquidity environment shifting significantly in 2018 as the Fed reduces its balance sheet and the European Central Bank (ECB) starts to taper its quantitative easing programme.
Although the Bank of Japan will continue with an ultra-loose monetary stance, we question whether this can be seen as a replacement for Fed or ECB asset purchases (see strategy section, “From QE to QT”). Looking longer term, we include our most recent forecasts for 7-year returns, which act as a timely reminder of the dangers of cash as anything more than a tactical asset.
The full Global Market Perspective is available below.
- A snapshot of the global economy in April 2021
- How the digital age is transforming India
- Inflation gathers pace in US, for now
- Seven lessons from 73 years of multi-asset investing
- Why the going is about to get tougher for investing in climate change
- Treasury tremors: how does the current sell-off compare with past episodes?
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.