Steady and synchronised

In this quarterly outlook we outline our asset allocation views and address three key questions on equities, US monetarypolicy and emerging markets.

Over the last few months, global growth has broadened and inflation has remained low. During September we upgraded our medium-term view on equities from cautious to neutral. We have increased risk across the board by gradually increasing equity exposure where we see value, using cashflows to do so and in some cases reducing cash balances in funds with excess cash. This change was largely triggered by our view on systemic risks becoming less negative.

Despite the ever-present short-term risks bringing uncertainty, we believe that it is unlikely that any of them escalate materially at the moment, or at least that they are appropriately priced into markets. These risks include the US debt ceiling, Chinese growth and geopolitical tensions with North Korea.

Whilst we remain negative on emerging market (EM) equities relative to developed markets, we have upgraded our view on local currency emerging market debt and EM currencies on  the basis of the favourable economic backdrop and limited recession probability. We also retain our positive view on emerging hard currency debt.

In contrast, we are still negative on the prospects for European investment grade debt and high yield given the tightness of credit spreads. We reduced from neutral our global duration exposure just ahead of the recent rise in yields. On a relative basis, we are negative on US treasuries and gilts and positive on German and Australian government bonds. We also remain positioned for strength in the US dollar.