On the basis of a global economy continuing to muddle through, we at Source still believe the best medium-term returns will be earned on equity-like assets. If we are wrong, and the global economy is heading for recession, there would be few places to hide (gold and quality sovereign debt, for example).
| Expected total returns (annualised, local currency) and Source Multi-Asset Portfolio* | ||||||
| Expected Total Returns | Neutral Portfolio | Policy Range | Source Multi-Asset Portfolio* | Position vs. Neutral | ||
| 1-year | 5-year | |||||
| Cash & Gold | -7.90% | -3.30% | 5% | 0-10% | 10% | Overweight |
| Cash | 0.10% | 0.60% | 2.50% | 0-10% | 10% | Overweight |
| Gold | -15.90% | -7.20% | 2.50% | 0-10% | 0% | Underweight |
| Government Bonds | -0.70% | -0.70% | 30% | 10-50% | 23% | Underweight |
| Corporate IG | -1.00% | 1.30% | 10% | 0-20% | 10% | Neutral |
| Corporate HY | -2.30% | 3.30% | 5% | 0-10% | 3% | Underweight |
| Equities | 3.50% | 6.80% | 45% | 20-70% | 50% | Overweight |
| Real Estate | 5.20% | 5.50% | 3% | 0-6% | 4% | Overweight |
| Commodities | -39.90% | -3.10% | 2% | 0-4% | 0% | Underweight |
| *This is a simulated portfolio. Source: Source Research | ||||||
The global economy appears to be still growing at about 3 per cent per year. Despite obvious concerns about certain economies, this has been enough to propel equity-like assets higher over the past six months, without pushing central banks to tighten. In some ways it may be the ideal (Goldilocks) scenario.
We suspect other Bric economies have passed the weakest point of their cycles and changes in consensus forecasts for 2016 GDP growth suggest we are not alone. The same applies to Australia, for which growth forecasts have recently been upgraded.
However, there has been a clear deceleration in major economies. Brexit concerns do make many cautious on the UK economy, while US data is not very convincing at this stage. The Fed is struggling to follow up on last December’s inaugural rate hike and the Bank of Japan, European Central Bank and Bank of England have eased further during the course of this year, with a mixture of rate cuts and more generous asset purchase programmes.
Unfortunately, these central bank policies have not gained traction, neither in terms of boosting economic activity nor raising inflation. Perhaps the central banks are fighting the wrong battle. Market data suggests inflation is governed in some way by demographics. If so, that is unfortunate because it suggests inflation will remain subdued over the coming decades, no matter what the central banks do.
Lower demographic growth will inevitably be associated with lower economic growth, so we may have to get used to a lower growth/lower inflation environment.
That suggests interest rates will remain lower for much longer than is generally appreciated – demographic trends are expected to remain subdued throughout the rest of the century.
Fortunately, there is little relationship between inflation and equity market returns, so we do not have to get too depressed.
Paul Jackson is head of research at Source
Key points
Three months on from the EU referendum and, so far, it can be said that Brexit-inspired volatility was short lived.
Two obvious political catalysts could be the Italian constitutional referendum and US presidential elections.
There has been a clear deceleration in major economies.
