Global CIO Video: "The markets are liquidity driven"
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Global CIO Video: "The markets are liquidity driven"

Progress on the COVID-19 front has been slow and bumpy, with many Western economies still stuck in more or less stringent lockdowns. Indeed, we expect the ongoing restrictions to lead to a soft patch in economic activity this quarter.

However, as vaccine rollouts accelerate and infection rates decline meaningfully while strong fiscal and monetary policy support remains in place, the second half should see strong economic growth. This should further support cyclical assets, and our Investment Committee maintains a pro-risk bias.

We retain our preference for equities, particularly emerging market (EM) equities, and commodities. We expect these asset classes to benefit from the eventual strong economic pick-up and central banks’ continued commitment to keep financial conditions easy. 

Watch the new House View video with John Woods, Chief Investment Officer APAC

Yet, even if central banks keep short-term interest rates unchanged, increasing growth momentum suggests that yields on government bonds will continue to rise. As credit spreads are now close to post-financial crisis lows, rising yields on benchmark bonds will hurt returns in credit. We therefore lower our return outlook for developed market investment grade bonds from attractive to neutral, and we take profit on our successful overweight allocation to EM hard currency sovereign bonds. In addition, we still favor cyclical and especially commodity currencies and believe that the USD will weaken further.

With regard to inflation concerns, our Investment Committee does anticipate a somewhat temporary spike around mid-year due to base effects, though we think it will diminish in the second half.