Investors should continue to overweight equities in a multi-asset portfolio to take advantage of a recovering global economy and strong reflationary policy support.
Despite a flat first quarter, the underlying uptrend in the global stock/bond (S/B) total return ratio remains firmly intact. Our base-case scenario is that global equities will generate low double-digit total returns in the coming year, while a US 10-year Treasury suffers a moderate total return loss. By extension, the S/B ratio is poised to advance materially further on a 12-month horizon.
In recent months, investor confidence in the vitality and durability of the economic recovery has been tested by adverse winter weather in the U.S. and choppy and disappointing data out of China.
Still, it is worth noting global equities and the S/B ratio have proven resilient to disappointing economic data, with the S&P 500 at a record high and euro area stocks at a cyclical high.
With US economic surprises increasingly likely to turn positive given the current depressed level, even in the short term the global S/B ratio appears biased to the upside.
The charts below provide relative risk and valuation perspective on stocks versus bonds. The MRB Global Stock/Bond Risk Indicator captures cyclical, valuation and technical components of the ratio and is at a broadly neutral level and in an uptrend. Barring a deterioration in the global economic outlook, such a reading points to a further rise in the S/B ratio (that is, stocks outperform bonds) on a six to 12 month horizon.
The main downside risk to our constructive outlook is the risk of a debt scare in China. A Chinese policy misstep or escalating fears of domestic financial problems could sour global investor sentiment and undermine business confidence.
We place low odds on such an outcome, but in the absence of a robust export sector, policymakers in Beijing face a significant challenge in restructuring the economy, reducing credit market risks and maintaining healthy growth. Investors need to keep a close eye on China, but avoid overestimating the probability of an adverse outcome.Peter Perkins is a partner at MRB - the Macro Research Board