Global Asset Allocation: October Insights

1. Market Perspective

• Global economic growth outlook remains favourable, albeit past peak levels, balanced by further progress toward global emergence from coronavirus shutdowns versus fading policy support and supply chain disruptions.
• Global monetary policy is expected to continue its path toward tightening, but central banks are on different trajectories, with some—particularly in emerging markets—having already acted in response to higher inflation while others continue to keep policy on hold awaiting stronger evidence of sustained growth.
• Long‑term interest rates could trend higher amid the outlook for above‑trend growth and inflation, but upside may be limited as growth and imbalances driving inflation moderate.
• Key risks to global markets include elevated inflation, central bank missteps, slowing China growth, supply chain disruption, increased regulatory pressures, higher taxes and increasing geopolitical concerns.

2. Portfolio Positioning

As of 30 September 2021

• We remain modestly underweight equities relative to bonds and cash as valuations look less compelling amid moderating growth and stimulus. Higher rates, rising input costs related to supply chain bottlenecks, rising energy prices and potential tax increases could pose challenges to the near‑term earnings outlook.
• Within equities, we continue to favour value‑oriented equities globally, US small‑caps and emerging market stocks as we expect cyclically exposed companies to benefit from a supportive global growth profile, coupled with unleashed pent‑up demand and inventory rebuilding as supply bottlenecks and coronavirus concerns abate.
• Within fixed income, we continue to favour shorter‑duration and higher‑yielding sectors through overweights to high yield bonds and emerging market debt given our constructive credit outlook.

3. Market Themes

More Predictably Unpredictable

After a crackdown on internet technology and educational companies last month, risks continue to emerge out of China, including the potential fallout in its massive real estate sector following missed debt payments by Evergrande—one of the nation’s largest property developers. The focused suite of regulatory actions out of Beijing are driven by efforts to balance wealth inequality and have had far‑sweeping impacts on sectors such as technology, education, real estate and health care. At the same time, authorities have started to more aggressively pursue its five‑year plan to reduce carbon emissions by limiting coal supply, resulting in power outages and shuttering factory activity leading to supply shortages. The degree of recent actions taken by the Chinese government combined with declining growth estimates is causing investors angst. Although unlikely to allow economic growth to fall significantly, China’s actions may force foreign investors and trading partners to reassess the risks of investing in a place that has become more predictably unpredictable.

Actions Speak Louder Than Words

Inflation is proving to be a bit more persistent and higher than many expected, putting pressure on some central banks around the globe to act. Several emerging market central banks, such as Brazil and Mexico, began raising rates over the summer to fend off higher prices, and now, some developed market central banks are similarly looking to act. The Bank of England (BoE) has signalled that higher rates are coming soon as inflation is expected to get close to 4%—double its target. And while the US Federal Reserve is planning on tapering asset purchases, it remains committed to its current rate policy, reiterating that elevated inflation levels will be ‘transitory’. The European Central Bank (ECB) similarly warned of not overreacting to current inflation levels, keeping current policy in place. Although most central banks believe inflation will prove temporary, prices could remain elevated for an extended period—perhaps too long for them to hold onto their words and not take action.

 

For a region-by-region overview, see the full report (PDF).