Developed markets have turned optimistic after the US presidential election, pricing in higher inflation and GDP growth in the US. Asset markets have reacted, with US equity markets rallying, global interest rates rising and yield curves steepening. Nevertheless, substantial uncertainty still looms around policies that are intended by the new administration and those that will actually be enacted. While higher growth is a possibility, our view is that fiscal expansion and protective trade policy when the economy is operating near full capacity makes higher inflation almost a certainty.
From an asset allocation perspective, the recent developments have caused us to view Treasury Inflation- Protected Securities (TIPS) rather than nominal government bonds as the “risk-free” asset. Moreover, we are cautious on emerging markets (EM). While EM asset valuations are cheap compared to the US, they have been large beneficiaries of increased globalisation over the last couple of decades and may face some headwinds. We think higher volatility is also likely, and we feel it is important to emphasise uncorrelated return drivers, such as alternative risk premia strategies, in multi-asset portfolios.
OVERALL RISK POSITION
We are modestly overweight risk. Given our base case of modest global growth aided by a fiscal boost in the US, we believe positive returns can still be earned via targeted risk-taking. We are maintaining ample dry powder and remain focused on relative value and bottom-up opportunities.
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