In terms of our asset allocation, we remain positive on equity markets but continue to tilt toward the more defensive areas such as high quality companies with a strong track record in paying dividends. This has meant holding back on overweighting emerging markets despite their superior growth rate. One feature of the current slowdown is that it is global and has not spared the emerging world, which remains coupled to global growth through its high dependence on trade.
Meanwhile, investors will continue to seek yield: a search which will be intensified by the news that the US Federal Reserve (Fed) intends to keep interest rates low until mid-2015 whilst continuing to bear down on long yields. Corporate credit and emerging market debt should continue to prosper in this environment despite the historically low level of yields.
Finally, staying with bond markets, we take a look at who will buy the increase in government debt from the perspective of the US Treasury market. It is often argued that the low level of yields will come to an abrupt end due to a buyers’ strike. The outlook is certainly challenging as private institutional investors will have to step up their interest in the Treasury market quite significantly. We estimate by how much. Will higher yields follow? Possibly, but much will also depend on the response of the authorities who are increasingly herding investors into “safe” government bonds through greater regulation.
Keith Wade, Chief Economist, Schroders