Positioning for lower inflation
Inflation is at its lowest since the financial crisis, likely to fall further in coming months. Thirteen central banks have announced measures so far this year, and with growth above trend, this disinflationary back-drop is good news for both stocks and bonds. We have reduced our underweight to commodities with oil supply likely to tighten this year on the back of capital spending cuts. Europe looks set to benefit from low interest rates, a weaker currency and lower oil prices, and we have reduced our US overweight as dollar strength puts pressure on earnings.
Lead indicators in focus
- Our global growth scorecard is marginally negative. The US is healthy, while Japan is mixed and EMs are clearly slowing. Europe shows signs of acceleration, but from a low base. Central banks are acting, with a powerful ECB programme announced, the BoJ already easing aggressively and EMs following suit. The oil price drop is likely to boost consumption, and growth should pick up in 2015.
- Our global inflation scorecard is still pointing down, with a positive impact on both stocks and bonds. The outlook moving forward depends on how real growth develops and how the Fed reacts to the disinflationary shock.
Current Asset Allocation positioning
- We are overweight both equities and bonds in response to low inflation and loose monetary policy. Consumer Discretionary and Technology sectors benefit from low oil prices and dollar strength so are overweight, while we remain underweight commodity-sensitive Materials and Energy.
- US data has softened, leading us to reduce our overweight, while overweights in Japan and Europe reflect expected boosts from stimulus. We remain underweight EMsdue to commodity-reliance and the challenge of dollar strength.
Our only currency overweight is the US dollar, while underweights in the euro and Japanese yen reflect commitments to monetary stimulus. We are also underweight Canadian and Australian dollars due to commodity price vulnerability.
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