Global CIO video: "The yield move has been orderly and appropriate"
In the USA, rapid progress with vaccinations and substantial additional fiscal stimulus has led to a sharply improved growth outlook, lifting government bond yields there as well as globally.
The USD 1.9 trillion pandemic relief bill will have a profound and immediate impact on the global economy. These are substantial cash flows for US households, which will be sufficient to boost both spending and savings, in our view.
The US economy may return to full employment by the end of this year, and we may see inflation running above 2%, not just in the near term when it will be boosted by base effects, but beyond the summer as well, where it may be lifted by tightening labor markets, as well as ongoing supply side issues and strong overall growth. All of this, and the possibility it leads to sooner-than-expected US Federal Reserve (Fed) interest rate hikes and maybe more-than-expected Fed hikes, is creating a little consternation in financial markets at the moment. But so far, the yield move has been orderly and appropriate given all the good news on growth that has arrived in recent weeks.
Rising bond yields and their implications for financial markets were also the subject of discussion in our latest Investment Committee meeting. We continue to believe that markets should be able to digest higher yields in the months ahead, as they occur against the backdrop of a strong reacceleration of growth. Yet, in the adjustment process, further setbacks are quite likely.
In light of these considerations, we have taken profit on our equity overweight, shifting the asset class back to strategic allocations in portfolios. In particular, we have removed our tactical overweight in emerging markets (EM) and especially China. However, our longer-term outlook for overall equities, including EM, remains positive, which is reflected in our increased strategic allocation to the asset class. We retain a mildly cyclical bias through our continued overweight allocation to the broad commodity index.