Long grind higher in risky assets, lower bond returns
>>> A broadening recovery with low inflation and easier policy
We expect the growth recovery to broaden as global growth picks up to
3.4% in 2015 from 3% in 2014. Inflation is likely to remain low, in part due
to declines in commodity prices, and as a result monetary policy should
remain easy. We think this backdrop supports a pro-risk asset allocation.
>>> Views across asset classes
* Equities: We remain overweight. We expect the long grind higher in
equities to continue, but at lower returns than in recent years as earnings
growth takes over as the key driver. We think there is potential for further
multiple expansion in Europe as a result of central bank easing.
* Government bonds: We remain underweight on both a 3- and 12-month
horizon. After another year of falling bond yields, we believe the return
potential for bonds is increasingly limited. We think term premia are too
low with the start of a Fed hiking cycle moving closer and that yields will
increase. However, in the near-term global central bank easing and low
inflation are likely to limit increases in bond yields.
* Credit: Underweight for credit on a 12-month basis, neutral on 3-month.
We expect further spread compression as investors move up the risk curve
in the low volatility environment. On a 12-month basis we see total return
potential as limited with the increase in bond yields. But, near-term credit
is likely to be supported by central bank easing, so we are neutral.
* Commodities: We stay neutral after the recent large declines in oil prices.
We expect oil prices to stabilize, but uncertainty remains high in the nearterm.
Outside of oil we expect increased dispersion in performance, mainly
driven by supply, with downside for copper and upside for nickel.