The ebb and flow of US market interest rates, inflation expectations and the future level of policy rates are currently the main drivers for asset returns around the world.
US market rates have risen further, as has the market’s forecast for the future level of the fed funds rate. Inflation expectations have also continued to advance.
The effects were seen in bond markets, both in the US and in emerging markets, while the relative performance of value stocks versus growth stocks was also impacted.
Eurozone government bond yields, however, have retraced part of the February sell-off thanks to a more assertive ECB.
What is next? We do not expect a significant increase in inflation expectations, but high inflation numbers this summer could still spook the markets and lead to a bigger sell-off. However, if the Federal Reserve continues to stand pat firmly, expected policy rates and real yields might ease back.
We are cautious about the outlook for rates and prefer assets that can benefit from reflation.
This month, we reduced our short position in euro sovereign bonds, while increasing our allocation to US, Japan and China equities. We are now overweight commodities again, but have trimmed our tactical overweight in gold. We are now long the Australian dollar.
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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
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