A just-published report updated our multi-asset investment recommendations, which are mildly pro-growth on a 12-month horizon. However, the near-run outlook is for some turbulence as there are a number of temporary headwinds for risk asset markets.
Global growth and inflation will both downshift over the next few months before stabilizing at faster rates than most investors expect. Thus there is the potential for a near-term growth scare (even if it ultimately will be misplaced), before an eventual upgrade of longer-term economic expectations develops. The latter will weigh heavily on the bond market and trigger another upleg in yields.
We continue to favor equities over bonds, but expect increased volatility and more modest stock market gains on a 6-12 month horizon. Bonds are priced for a return to the low growth and low inflation environment of the 2010s, which is most unlikely, and we remain maximum underweight fixed-income within a multi-asset portfolio. There is an air pocket underneath many of the global equity leaders, as prices have significantly front run the improvement in corporate earnings. We are overweight select non-U.S. equity markets including EM and euro area, which offer relatively better valuation support and earnings upside. For now, a neutral weight on the U.S. is recommended within a global equity portfolio, but with a downgrade bias and we favor financials and health care within the U.S.