(London): The global economy and financial markets are moving closer to normalisation, according to the latest quarterly House View from Aviva Investors. With the era of extraordinary accommodative monetary policy that followed the global financial crisis slowly in retreat across the globe, fundamentals will once again have greater influence on asset prices.
The US Federal Reserve has raised rates three times since December 2015, with a further two hikes expected this year and three more in 2018. The European Central Bank and Bank of Japan may be starting to consider exit strategies from quantitative easing and negative interest rates as their economies improve.
Global GDP could rise to around 3.5 percent this year, the fastest growth rate since 2011. Above-trend growth, especially in the major economies, should put upward pressure on wages and core inflation. Longer-term expectations of future inflation have returned close to pre-crisis levels.
Ian Pizer, Head of Investment Strategy at Aviva Investors, commented:
“Nearly ten years after the onset of the global financial crisis, fundamentals are improving and investors are slowly shifting their focus to the improving economic picture.
Stronger global growth should translate into higher corporate earnings, but rising inflation could act as a headwind for US and European fixed income. We prefer owning equities over duration, with important differentiation to be made within asset classes and across geographies.
US equity prices should reflect an improved outlook based on stronger growth. Potential for fiscal stimulus should also support earnings and make the valuation adjustment occur more quickly.
From a valuation perspective, European equities are more attractive than their US counterparts. However, Eurozone sovereign bonds and credit offer a poorer risk-reward profile. The UK is clouded by Brexit negotiations. We see downside risks for UK equities and bonds, where we have an underweight stance. Our view on sterling is neutral.
Emerging market debt and equities should do well as fundamentals return to the fore. On valuation grounds, local debt is far more attractive than hard currency."
Notes to Editors
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