Vincent Chailley, CIO of H2O Asset Management
Impending monetary policy normalisation from the Federal Reserve, together with structural demand for long bonds, imply a flattening of the long end of the US yield curve and outperformance of the dollar. To a lesser extent, the same can be said about the gilt curve and the pound.
The slowdown of BRIC countries, particularly China, together with tougher financing conditions, will continue to put pressure on emerging market assets, particularly on their currencies. Conversely, developed markets will benefit from asset reallocation and should remain supported, G4 equities in particular.
Meanwhile, in Europe, the European Central Bank's renewed activity and increased demand for fixed-income assets bode well for peripheral bonds, in the context of improving solvency and expected increased growth thanks to a lower euro and falling energy prices.
The pace of global growth continues to remain less important than the relative regional dynamics as far as relative asset prices are concerned.
The US economy is expected to continue outperforming the rest of the world, while at the same time reaching the point where the Federal Reserve's normalisation strategy cannot be postponed anymore.
The UK is not far behind. The European Monetary Union has been lagging, but will eventually follow the same path having been affected by the same past negative shock (cleansing of balance sheets) and the same new positive shock (weaker currency and lower commodity prices).
The contrast is striking with the EM situation, which will continue to suffer from a series of negative shocks: cyclical and structural slowdown of China, worsening terms of trade, tighter financial conditions related to the stronger dollar, and, finally, an overhang of private sector leverage amplified by lower trend growth.
Finally, the importance of global links is likely to shift away from trade to concentrate on financial flows. Tighter Federal Reserve policy, stronger dollar and lower commodity prices will have a major impact on international flows, which could even turn disruptive at times.
Beware, however, that flows back into US assets, when the American economy outperforms the world (in particular emerging markets), are a diverging force for the global economy, as was the case in the second part of the 1990s.
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