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Global Market Perspective Q1 2021: economic and asset allocation views


News that a Covid-19 vaccine is on its way has provided a boost to the
outlook for the world economy, and spurred a significant rally in risk assets.

Over the fourth quarter, the more cyclical equity markets of Europe and emerging markets outperformed. However, the return fortunes of bonds were more mixed. There were positive gains in credit and emerging market sovereign bonds. But government bond returns were broadly flat and negative for US Treasuries.

We have upgraded our global growth outlook for the world economy. In the near-term, the return of lockdown restrictions has weakened activity in the fourth quarter, and may do so in the first quarter of 2021 if restrictions remain. But in the second half of the year, we expect global growth to be strong due to the vaccine coming on line.

Against this backdrop, inflation remains relatively contained in our forecast allowing central banks to keep monetary policy loose.

The greatest risks to our central macro view are a “taper tantrum 2”, as markets react adversely to a moderation in quantitative easing (QE), and a stronger recovery particularly now the Democrats control Congress and can expand US fiscal policy more aggressively. Another risk is a weaker dollar.

From an asset allocation perspective, we remain positive on equities but have trimmed positioning in high yield (HY) debt. Equity valuations continue to be supported by depressed bond yields. However, return opportunities in credit have been reduced given further tightening in spread levels.

We remain positive on corporate investment grade (IG) bonds due to continued support buying by the central banks. Within equities, we have kept our positive exposure to emerging equities and increased positioning in Japan, as there is evidence of a strong industrial recovery in Asia.

In comparison, we have turned negative on duration. We believe that government bonds, particularly German Bunds, offer limited protection against the prospect of a growth disappointment.

Please find this quarter's full document below.

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Global market perspective - Q1 2021 16 pages | 4,532 kb

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