We remain constructive about the global economic outlook, expecting a gradual improvement in activity over the course of the year. Consequently, and despite the huge rebound in risk assets over the first quarter, we are maintaining a moderately positive stance toward equities and credit (within a fixed-income portfolio), and are bearish toward G7 government bonds on a 6-12 month horizon.
In terms of credit, global and U.S. investment-grade and high-yield corporate bond total returns have returned to cyclical highs. They have also rebounded in relative terms although, despite the significant narrowing of spreads, they have not fully recouped fourth-quarter losses given the strength of government bonds. There is still scope for further spread narrowing as the economic expansion progresses over the coming 6-12 months. Accordingly, we continue to recommend an overweight stance on corporate bonds and EM debt, although absolute returns will likely be unimpressive if government bond yields rise, as we expect.