Markets endure roller-coaster ride
Financial markets had a roller-coaster experience in the first quarter, with sharp falls in January being followed by a rally which left investors close to where they had started by the end of March.
The moves closely tracked oil prices and the Chinese yuan (CNY) as investors weighed the odds of a global recession. Our forecasts, backed up by our key indicators (see the research note), suggested that such fears were overdone and that the world economy would avoid such an outcome.
However, it also took action by the major central banks to help investors regain their risk appetite. In particular, the Federal Reserve (Fed) signalled that rates in the US would remain lower for longer and in doing so brought a halt to the US dollar’s remorseless appreciation.
Although markets ended the quarter on a better note, the outlook remains difficult. Prospects for global GDP growth remain tepid and consequently corporate earnings growth is likely to remain lacklustre.
We would also note that should we see a significant strengthening of activity, the prospects for a Fed rate rise are likely to increase significantly.
Trouble with the cycle
In this respect, markets face a typical late cycle problem where central banks will be looking to tighten on signs of an acceleration in growth.
Whilst we are some way from this in the eurozone and Japan, the US - and to some extent the UK - are ahead in the cycle and their central banks are likely to move in this direction over the next 12 months.
Consequently, there is a slightly more defensive tone to our asset allocation this quarter by, for example, being neutral equity and favouring the US equity market over the higher beta Europe ex-UK. Credit is a preferred area, where we believe high yield bonds are attractive on our central view.
Meanwhile, investors will continue to seek pockets of value and we have included our 30-year returns to help identify the areas which offer the best potential for long run returns.
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