Negligible cash returns encouraging return of the carry trade

Recent market volatility should serve as a reminder that while the risk of a prolonged recession has been averted, there is still uncertainty about the strength of recovery and the possible exit strategies from unprecedented fiscal and monetary stimulus measures.

So where does this leave markets? With interest rates at historically low levels – and set to stay there for some time yet – returns on cash will likely be negligible for a while. This is encouraging the return of the carry trade with investors taking on more risk to generate income. We expect this trend to continue, helped by the recovery in company profits, which is likely to continue over the next six to 12 months, boosting risk assets over this period. Consequently, we would expect more gains for credit and equity markets. Although we have seen a significant rally in these asset clas...