The global economic recovery continues onwards at a quicker magnitude than initially expected. Vaccine rollout and additional fiscal stimulus provide support, with the OECD raising forecasts for global GDP to 5.6% from 4.2% for 2021.
Investors face a quandary, stronger economic growth, due to further stimulus and vaccine rollout, alongside the potential for higher inflation. In light of the above, sovereign bond prices have moved significantly and quickly with 10 year US Treasury yields rising from 0.91% at the start of the year to 1.73% (yields move inversely to price) . We believe these moves are justified with yields now at pre-pandemic levels but still low relative to history. Current yield levels are an expression of a move to normalisation driven by stronger growth.
We know there will be an inflationary impulse due to last year’s COVID-19 induced price falls which will test both central banks and investors’ reaction functions. It is impossible to second guess. Globally, central banks continue to offer support and indications are this is unlikely to change in the short term. We believe that global central banks will be both careful and credible in their messaging overall and they are in no hurry to raise rates, they want growth to take hold and be sustained.
All of these factors lead us to re-emphasise our central economic scenario of a cyclical recovery.
From an individual asset class perspective, discussion focussed on:
- Sovereign bond yields are currently not attractive enough for the True Potential manager cohort to increase positions. The current yield environment is acknowledged as low compared to history, but there is belief in the diversification benefits from holding the asset class. The key here is that the inverse correlation between bonds and equities needs to hold moving forward.
- Emerging market assets relative to developed market assets were discussed. Overall, our Portfolios have repositioned towards developed markets for both equities and bonds. China’s moves to stabilise their economy, US Dollar stabilisation/appreciation, and the potential for developed markets to see a stronger uplift in economic growth over the short term all support this thesis.
- Over the past six months, US smaller companies have become a larger part of the True Potential Portfolios with managers looking to this asset class as benefitting from the economic recovery. From a strategic perspective, the long-term view continues to be positive, but tactically positions have been reduced after the recent strong performance.
- Gold is viewed as less attractive with positions reduced. Higher real bond yields and US Dollar stabilisation have weighed on the asset class.
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