As world growth recovers from the Covid-19 shock and starts to normalise, investors face key questions such as how long will high inflation last; will central bank tightening shift the balance of risks from higher inflation to slower growth; are emerging market assets attractive enough to prompt a return of foreign investors; and can financial risk in China be contained.
Broadly, we believe the backdrop continues to favour risk assets (equities) over safe haven instruments (bonds) as long as real yield stays low. In emerging markets, the 12-month forward price-earnings ratio relative to global equities has fallen to a 10-year low, suggesting that EM equities offer good value. The probability of China risk wreaking havoc on global markets seems small.
Watch our monthly asset allocation video with Daniel Morris for our assessment of the inflation spike, the factors affecting the economic reopening, and the odds and timing of central banks normalising interest-rate policy.