Notes
Opportunities
- Developed market sovereign debt should fare well as interest rates peak; inflation protected US bonds look good value
- High quality credit, such as US investment grade debt, should be a bright spot in non-government bonds markets
- Quality stocks should outperform in a period characterised by muted economic growth
Threats
- Disinflation stalling
- Over-tightening by major central banks could tip the economy into recession
- Escalation of geopolitical tensions cannot be ruled out
General
- The US’s stellar status in global stock markets will dim, while European equities will surprise in a good way, for a change. At the same time, emerging market (EM) economies will outpace the developed world
- We also expect some of the tight correlation between asset classes that has characterised the markets during the past few years – where equities and bonds have moved in lock-step – to ease
- That said, the Bank of England looks likely to be the first major central bank to cut rates. The threat of recession could mean it starts to ease as early as May. We expect the US Federal Reserve to be more cautious in delivering cuts than the market currently expects, but still see it trimming twice in the latter half of the year and the European Central Bank doing the same.