We are witnessing the transition from monetary stimulus to fiscal stimulus (tax cuts, infrastructure spending) and from disinflation to relation. The rise of populism in the Developed Markets is finally forcing governments to adopt more pro-growth policies after years of austerity.
De-globalization and protectionism are becoming themes with more weight and credibility in context with the rising populism.
The current economic cycle should be stretched even further given the pro-growth policies to be implemented around the world. Global growth will still take some time to recover but we anticipate positive signs in Europe, U.S. and in selective Emerging Markets.
The largest risk we see to the global growth would be escalating tensions between China and the U.S. affecting global trades and the potential election of populist parties in major European countries. We see increasing value in global equities over investment grade bonds.
We favor high yield credit over investment grade and shorter duration as we expect yields (especially in the U.S.) to rise over time.
U.S. domestic equities (given their high valuations) justify caution and we foresee increasing potential for European and selective Emerging Market equities to outperform.
Government and high credit rating Investment Grade bonds face structural headwinds as the markets start to focus on interest rates normalization.