Risk assets performed well in the first quarter as investors responded to evidence of a synchronised recovery in global activity. Markets also demonstrated resilience in the face of an earlier-than-expected tightening of monetary policy by the US Federal Reserve (Fed) who raised interest rates by 25 basis points on 15 March. However, despite the outperformance of equities and credit over safe assets, investors have recently begun to question the Trump reflation trade.
In our view, stagflation risks are increased by populist policies which tend to be anti-globalisation by limiting trade and immigration (see the note on page 13 "Is populism good for markets?"). At this stage, though, such risks are yet to materialise and with business confidence high, investors are primarily concerned that the US administration fails to deliver its pro-growth agenda. Such fears were increased by the withdrawal of the healthcare bill amid divisions amongst Republicans in Congress.
In response we have directed our overweight in equities away from Japan (seen as one of the bigger beneficiaries of the reflation trade) and towards the emerging markets (EM), while remaining neutral on the US equity market. This view is supported by signs that the US dollar is stabilising, thus reducing pressure on emerging market currencies and monetary policy.
In this edition of the Global Market Perspective, we include our projected returns for asset classes over the next 30 years. While such figures should be taken with a pinch of salt, the process of forecasting long-run returns enables us to focus on the key drivers such as productivity growth. The latter remains puzzlingly weak and we look at one aspect of this in our research note, which asks whether the US economy has become less dynamic.
Keith Wade, Chief Economist and Strategist, 11 April 2017.
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