Macro outlook: Sustained growth and higher bond yields
Growth has improved substantially. Most of the acceleration we had expected is now behind us, but we expect growth to be sustained at current or slightly higher levels, with the US growing at around 3% through 2017. We think the likelihood of a rise in government bond yields has increased and see this as a key aspect of the near-term macro outlook.
Our recommend allocation and investment themes
Equities: We downgrade to neutral over 3 months as a sell-off in bonds could lead to a temporary sell-off in equities. This makes the near-term risk/ reward less attractive despite our strong conviction that equities are the best positioned asset class over 12 months, where we remain overweight.
Commodities: We expect dispersion within commodities due to different supply situations together with backwardation to drive returns and see opportunities in nickel, zinc palladium and aluminum. However our return forecast for the asset class as a whole is low and we remain neutral.
Corporate credit: We downgrade to underweight over both 3 and 12 months. We think spreads will narrow slightly, but given already tight levels, rising government bond yields are likely to dominate the returns, especially for US IG credit where spreads are the lowest.
Government bonds: We stay underweight. We expect yields to rise due to sustained high US growth and accelerating inflation, a decline of deflation concerns in Europe and an improving inflation outlook in Japan.
Investment themes: We seek to benefit from sustained growth at current higher levels and the return of cash to shareholders.
