Quarterly Global Outlook-April
Base Case: Improving Global Economic Outlook. We foresee an improvement in the cyclical outlook with a narrowing gap between Advanced and Emerging Economies. At the Central Banks’ level we expect a diverging trends between Fed (tapering) and BOJ/ECB, still very accommodative. EM Central Banks should continue to act to sustain growth/cool inflation.
Equities – Overweight. The case for global equities is confirmed by leading Central Banks’ commitment to loose policies and a bias to economic growth when risk factors resurface. A key condition is that core bond yields will remain stable during the Fed’s QE tapering, posing little danger for economic and corporate earnings growth. European equities provide a relatively attractive opportunity to play the recovery, with banks’ commitment to redress their balance sheets as a further support.
Bonds-Neutral. Core bond yields do not look attractive as global growth strengthens, but the need to hedge against downside risks remains, as Emerging Countries struggle to regain past growth as well as investor confidence and are urged to enact key economic reforms. On a more fundamental note, Eurozone bond yields may be kept down by the ECB’s adoption of US-like quantitative easing to fend off the risk of deflation.
Main Challenges. Policy mistakes and geopolitical tensions are the major sources of risk that could trigger financial markets instability. These challenges could be especially damaging to Emerging Markets, in the midst of their efforts to regain investor confidence through radical economic reforms.