Stronger global growth and returning inflation should continue to support risk assets, but is likely to lead to a more challenging environment for fixed income, according to the fourth-quarter House View from Aviva Investors.
Global GDP could rise to between 3.5 and 3.75 per cent this year and in 2018. Inflation is likely to hit two per cent by the middle of next year in the US, with a more gradual rise in the Eurozone and Japan.
With central banks starting to unwind a decade of extraordinary monetary policies, market volatility could rise from close to historical lows as correlations break down. The US Federal Reserve has raised rates four times and started to unwind its asset holdings, while the European Central Bank is expected to begin reducing quantitative easing at the start of 2018. Despite the uncertainty around Brexit, even the Bank of England has hinted it may raise rates soon.
Equities are likely to fare better than fixed income in this environment, with Eurozone and EM equities offering better relative value than US stocks. EM debt, both in local and hard currencies, currently offers more attractive opportunities than developed market sovereign and corporate debt.
Ian Pizer, Head of Investment Strategy at Aviva Investors, said: “The threat of deflation has passed and inflation is slowly returning to levels close to central bank targets. Stronger growth has led to tighter labour markets, which is resulting in upward pressure on wages.
“Robust global growth will continue to support these trends, justifying central banks’ decisions to start withdrawing stimulus or consider doing so. The global reflationary environment, alongside reduced central bank liquidity, will be supportive of risk assets but leaves global rates markets more challenged.”