Global CIO video: "A lot of good news is priced in"
In a brief span of time, investors went from being concerned about inflation and rising bond yields to regaining confidence in the strong growth outlook amid supportive financial conditions and rising earnings estimates.
Positive investor sentiment – which by now borders on euphoria, according to indicators such as our Risk Appetite Index – has helped global equities hit fresh record highs in recent weeks. Equity market volatility, in turn, reached a pre-pandemic low.
In our latest Investment Committee meeting, our discussion focused on equities' continuing ascent. Positive as the recent gains may be, they do make us wary of chasing the rally, as equities may well be heading toward overbought territory. We thus consider it prudent to keep our overall equity allocations at strategic levels for the time being. Nevertheless, we expect the asset class to deliver attractive returns in the mid-term.
We retain a slight cyclical tilt in portfolios through our continued overweight allocation to the broad commodity index, which provides exposure to the economic recovery from the pandemic. Our stance on fixed income also remains unchanged: government bonds are unattractive, in our opinion, and neither high yield nor investment grade bonds offer appealing spreads. Rather, we believe investors should turn to emerging market hard currency bonds for a favorable yield pick-up. In terms of currencies, we remain neutral on the USD, preferring cyclical and commodity currencies instead.