Yields are not hurting equities yet
Governments are ready to bolster the recovery further by means of ambitious economic stimulus programmes. At the same time, depleted inventories in the manufacturing sector, combined with consumers‘ catch-up needs, are resulting in a surge of new orders. The easing measures of recent weeks have also allowed businesses in the service sector to re-open. Thus, the economic outlook for the second half of the year is better than it has been for a long time.
The demand bounce is confronting many companies with new challenges. Cutbacks in the production of raw materials, combined with a shortage of empty containers in Asia, have led to bottlenecks in many sectors. This will slow the recovery but not stop it. As these are temporary effects, we do not believe that the resulting rise in producer prices will be passed on directly to consumers.
Nevertheless, the central banks will not be overly relaxed. It is true that the risks of recession and deflation have receded, and emergency asset purchase programmes will have to be reviewed in the light of reviving economic momentum. But previous episodes have shown how difficult it is to exit from an ultra-expansionary monetary stance. We assume that the Fed will modify its tone during the summer in order to prepare the markets for a course correction. However, raising key interest rates will not be on the agenda for some time to come. The first step will be a gradual unwinding of emergency measures.
...and old challenges
In view of the economic momentum, we expect government bond yields to rise again. However, the movement should not be quite as violent as at the beginning of the year. We recommend investors to keep interest rate risk low. Globally oriented, opportunistic bond funds will probably fare better in such an environment.
We expect government bond yields to rise further, though the movement is unlikely to be as steep as at the start of the year. We advise investors to maintain a low exposure to interest rate risks. Globally oriented opportunistic bond funds should fare better in this environment. And Chinese bonds represent an attractive addition without unduly increasing credit risk.
The economic situation clearly indicates that equities will perform better than bonds. Equity markets currently present an untypical picture. Instead of the usual caution in the early stages of an upswing, the mood among investors is now one of extreme optimism, not to say euphoria. This, combined with current high valuations, limits the markets‘ fundamental potential. Nevertheless, equities should benefit from positive economic momentum. We see further potential in selected themes and the European region. Sustainability aspects are also becoming increasingly important for investments.
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