Schroders: Global Market Perspective

After a testing start to the year, risk assets rebounded in the second quarter with the US equity market making new highs. Underpinning this were signs of better economic  activity in the US and continuing recovery in Europe, whilst China began to show signs  of stability. The sense that central banks were becoming less supportive of economic  activity dissipated and then reversed as the European Central Bank (ECB) announced  a range of measures to support growth and head off deflation. Meanwhile, Federal  Reserve (Fed) chair, Janet Yellen emphasised that US interest rates would remain low  well into the future, even as the economy recovered. 

Against this backdrop the decision to focus our risk budget on equity markets has proven correct, but we have also seen strength in credit, emerging market debt and  peripheral European sovereign bonds. Carry trades are coming back and there has  been a rally in the fragile 5 currencies. Encouraged by central bank commitment to easy  policy and the low level of volatility, investors have resumed their search for yield.  

Going forward we see continued recovery in the world economy and are looking for  growth in the developed world to gradually spread to the emerging markets through  stronger trade. However, alongside this positive development we also anticipate upward  pressure on US rates as the labour market continues to tighten and inflationary  pressures build. Corporate profits may than come under pressure as wages pick up.  Market reaction will depend on how the Fed responds and we see a strong case for the  higher interest rates in the US (see Strategy note). Elsewhere though, monetary policy  is expected to remain easy with the ECB and Bank of Japan looking to stimulate growth  and head off deflation. 

Notwithstanding these challenges, the environment remains positive for markets in the  second half of the year. However, as valuations push higher we are examining our  stance on risk assets. Equities continue to look attractive, but we see scope for some  profit taking and a rotation towards those markets which have lagged the rally.  

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