The sell-off in global sovereign bond markets that has been underway since mid-2016 paused in early 2017, with emerging market debt outperforming amid strengthening global economic growth and inflation expectations.
Global central bank policy seems to be beginning to shift slowly away from a loosening bias, albeit we recognise that it is still highly accommodative, even in the US. As such, we expect yields to continue to experience upward pressure and it is possible the multi-decade bull market in global bonds has now passed its apex.
Within equity markets, the rotation that the developing economic and political backdrop has caused among the various industry sectors has lost some momentum. However, we are still seeing higher long-term bond yields weighing on the performance of stable growth ‘bond proxies’, such as telecoms, utilities and consumer staples, while sectors benefiting from stronger global growth, such as materials, continue to outperform.
Meanwhile, the corporate earnings picture is encouraging; we note that the strong performance of a number of major technology companies has helped the sector lead the market since the turn of the year.
Having strengthened significantly in the latter stages of 2016, the dollar has seen some reprieve so far in 2017, despite the divergence between monetary policy in the US and the rest of the world. We note that the potential for the president to enact inflationary and pro-growth policies has largely been priced into markets, while we believe the possibility of his protectionist trade and immigration policies hurting growth has not been as heavily reflected. This suggests that further strength in the dollar could be more muted going forward.
Meanwhile, sterling remains well below its pre-Brexit level, although recent developments have seen short sellers of the currency take profits in 2017, particularly against the dollar. We note that sterling has reached levels that could be considered cheap in terms of many long-term assessments and that although newsflow is likely to remain a headwind, it could be argued that the currency is exhibiting an asymmetric risk-reward profile at current levels.
More broadly, Brexit newsflow remains a key driver of UK asset markets and although the secession’s potential longer-term effects continue to concern business managers and policymakers, the domestic economy has strengthened in recent months. Sterling’s devaluation has provided some support, as have additional easing measures from the Bank of England (including a boost to its asset purchase programme) and the government’s plans to increase fiscal spending.
Alongside Brexit, Donald Trump’s election victory can be seen as proliferating the populist political revolution. If these events have boosted the popularity of anti-establishment political parties elsewhere in the world, we could see dramatic changes to the economic and political status quo in the coming months, particularly in Europe, with France, the Netherlands and Germany holding elections in the coming months.
We continue to note that questions over the eurozone’s ongoing sustainability could put further pressure on European assets, including the euro, which recently reached lows against the dollar not seen since 2002.
Given these developments and forthcoming events, we have been gradually reducing portfolios’ cash balances and increasing exposure to selective equity themes, as well as continuing to invest in defensively-positioned structured products.