The rate of worldwide GDP growth may be starting to normalise, but economic and policy crosscurrents are muddying the post-pandemic recovery. Among the top worries: Inflation expectations related to supply-chain snarls; a new Covid variant and possible spill-over effects from slower growth in China, the world’s second largest economy.
This is a shortened version of our monthly Asset Allocation Outlook.
We see the inflation spike as temporary and believe rising vaccination rates should allow economies to continue to reopen, assuming the Omicron variant does not turn out to be resistant to existing vaccines.
The growth deceleration in China will likely remain manageable as Beijing gradually shifts towards (more) policy easing. Major developed countries’ fiscal stimulus should boost global growth.
The normalisation of central bank policy will likely also proceed gradually.
We believe that overall, this backdrop continues to favour risk assets (equities) over safe-haven instruments (bonds) as long as real yields remain low.
We are long equities. Reflecting the expectation of a recovery in emerging market equities, we have added a long position in global EM equities and reduced our long US equities position.
We have reduced European small caps in favour of North American small caps and European large caps. The latter should have more ‘legs’ than other large-cap stocks. We have kept our long Japanese equities position.
We believe the prospect of higher yields makes US Treasuries look precarious, so we have added to our tactical short position in 10-year Treasuries.