The pace of global economic growth has picked up in recent months. After recovering from a trough in April, global growth continued its upward trajectory through to the end of 2016, driven primarily by growth in the U.S., particularly in consumption, although lead indicators suggest growth may now be starting to peak. At the same time, there is potential for inflationary pressures to rise. Headline rates have already started picking up across the globe due to higher oil prices. Core inflation, which excludes energy and food prices, is yet to follow suit and move higher, however. This is a factor we are watching closely as a meaningful rise in core inflation could have a significant impact on bond markets.

Despite this more sanguine economic environment, we are concerned about a number of approaching risk events. Donald Trump's inauguration as U.S. president in January could shed more light on potential policy direction under the new administration, which so far is unclear. In Europe, the UK is set to trigger Article 50 by the end of March, beginning the formal mechanism for its exit from the European Union, while France will hold presidential elections in April and Germany will hold national elections later in the year. On the monetary policy front, after hiking interest rates in December, the U.S. Federal Reserve could further raise rates over the course of 2017, in our view, although this will be largely data-dependent. The combination of "Trumponomics", tighter monetary policy, and political risk in Europe could lead to heightened volatility, causing large swings in prices. Against this backdrop, we maintain a cautious approach but look for opportunities identified by our fundamental research approach to take advantage of any pricing anomalies and dislocations that might occur in a volatile environment.

Emerging markets face headwinds in the form of tighter monetary policy in developed markets and continuing U.S. dollar strength. This could impact emerging market countries that are heavily reliant on capital inflows, although countries with stronger balances of payments could potentially decouple from the tightening cycle in the U.S. and provide "safe havens" for fixed income investors. Furthermore, some larger emerging market economies, such as Brazil and Russia, have significant potential to cut interest rates over the coming years as a result of receding inflationary pressures. Overall, we are positive on the prospects for emerging markets but look for the right timing to selectively add.

Rising uncertainty around the Chinese economy could also contribute to volatility. China continues to rebalance its economy toward domestic services and consumption, a secular shift that will take many years and would be a positive development when it happens. In the meantime, we believe China will continue to decelerate as the economy matures and becomes more balanced. Recent stable onshore growth in China has contrasted with growing pressure on capital outflows. Government tightening of regulations on debt markets, along with potentially heightened geopolitical tensions, could cause volatility to rise. We will continue to monitor the situation as it develops. Overall, we remain cautious.