The recent volatility and weakness in government markets originated in the eurozone as investors rejected the ultra-low yields on offer. Although the markets appear to have stabilised, the rise in volatility was an unwelcome feature of supposedly ‘safe’ assets. We remain underweight in bonds as an asset class and we still see no value in gilts. But we do see value in some selective areas and we favour high yield as valuations are more attractive following the weakness in the second half of last year, with some high-yield funds offering yields of 5-6 per cent.
Head of multi-asset, Aviva Investors
The UK’s economic cycle is closer to that of the US than Europe, and we think the Bank of England is likely to follow the Federal Reserve in raising interest rates in early 2016. The UK economy is in reasonable shape and we expect to see growth of 2.5-3 per cent this year.
The eurozone is set to remain in policy stimulus mode for some time, and it has now seen seven consecutive quarters of growth. Last year the continent grew by around 1 per cent and we expect growth closer to 1.5 per cent in 2015. However, unless better sentiment leads to markedly higher spending, the worry is that things could slow or stall later this year or early 2016.
Asia continues to be the fastest-growing EM region, although progress has slowed significantly. Greater reforms are required if the region is to boost productivity and bring growth back towards potential. Meanwhile, eastern European economies are enjoying a modest upswing in activity and Latin American economies continue to suffer from the slowdown in China and the falling commodity prices that have ensued.
In spite of an effective interest rate of zero, US GDP growth has averaged just 2.3 per cent in the past six years. The Federal Reserve is now preparing its first rate increase since 2006, which we expect to see in September or later. For now, markets continue to doubt the Fed’s ability to deliver the tightening it has so far forecast, but if GDP growth revives as we expect and inflation drifts higher, there is clearly scope for some surprises.
Global real estate returns remain robust. Total returns in 2014 reached 9.9 per cent and we expect something similar in this year. Property continues to offer good value relative to other asset classes, with spreads over government bond yields unusually high.
With monetary policy diverging between Europe and the US, a potential Greek exit from the eurozone, a slowing Chinese economy and a collapse in commodity prices, it remains difficult to judge where ‘fair value’ lies for government bond markets. Meanwhile, the economic outlook continues to favour global credit as, in spite of the prospect of a US interest rate rise, we expect global monetary policy to remain highly accommodative.