Richard Dunbar

The prospect of a number of effective vaccines being rolled out through 2021 offers an ‘escape hatch’ out of the pandemic and its economic effects. This leaves us expecting above average global economic growth over the next two years.

As regards inflation, we still expect the COVID crisis to prove net disinflationary. The global economy has enormous spare capacity, which will put sustained downward pressure on wage growth and firms’ pricing power. And while there has been speculation about ‘inflation regime change’, the disappointing timidity of central bank framework reviews and increasing reactivity of fiscal policy is not pointing in that direction.

This means monetary policy should remain very loose, with central bank balance sheet expansion the marginal tool of policy. We expect the Fed to lengthen the duration of its asset purchases around the turn of the year, suppressing long-term bond yields even as the economy recovers.
The ECB and Bank of England are both set to increase asset purchases further. And while Chinese monetary policy has stopped loosening amid a renewed focus on financial stability, we are not forecasting rate hikes.

Within asset classes, we expect to see continued large dispersions in returns, reflecting the significant fundamental gaps that are opening up across countries, sectors and companies. This broadening of market leadership should be regarded as healthy and is required for markets to move forward.

While ‘value’ and ‘growth’ are often discussed in this context, it is our view that these monikers are somewhat simplistic. We are happy to lean into more cyclical markets and sectors, but at the same time remaining aware of the challenges faced by some of the constituents of these areas of the market.

Interest rates and short dated bond yields will remain low for the foreseeable future, partly due to wider output gaps / spare capacity and also central bank actions to manage large government deficits and debt levels. Hence sustainable higher yielding debt, selected global equity and selected real estate will become even more attractive. While “carry” is in principle attractive in this environment, our message would remain one of continued selectivity in security selection.

Following the money’ and assessing what the central banks are buying is likely to remain an important support. However, as above, while central banks are intervening in some of the lower quality ends of the market (i.e. selected areas of High Yield), it is not in all areas – selectivity remains key. It is also worth noting that this support is now much more fully reflected in valuations.

Our ‘House View’ portfolio is overweight equities, favouring a mix of global developed market equities and emerging market equities. In bond markets, as noted above, we still favour high yield and emerging market bonds, but would also hold some developed market government bonds to give balance and diversification to the portfolio.

We have recently taken our global investment grade credit positions back to neutral. While issuers continue to trade satisfactorily and defaults are low, the continued spread tightening off the March levels leave more meagre returns from here. As regards currencies, we would expect modest weakening of the dollar, and would continue to prefer the Yen in the portfolio.