Stocks
From our perspective, equities will continue to provide the best returns over the medium term of all the major asset classes. If we are right, in the belief that the cyclical recovery is coming through, then that supports equities as well and price trends are favourable. We certainly still favour equities versus fixed income. There is always the risk that equities may suffer from bouts of volatility should negative shocks occur, but over time they should outperform.
Fixed income
Looking within fixed income, high yield is probably the best place to be, in our view. While the spread you get is not especially wide, it is wide enough and we should be able to generate mid-single digit returns from that sector of fixed income. For government bonds, you are generally looking at very low returns.
Within emerging market debt there are some opportunities on a selective basis and we hold positions in Mexico, for instance.
Currencies
In light of an expected reduction in monetary policy accommodation, between the major currencies we have a preference for the US dollar over the medium term. We think US growth is going to outpace growth in the rest of the developed world and believe the Federal Reserve is going to start shifting to a slightly tighter monetary policy so that should be favourable for the US dollar. It is also inexpensive in valuation terms. The Japanese yen would probably be the weakest out of the major currencies because Japan’s central bank is easing policy aggressively.
With reference to emerging market currencies, for the first ten years of this century we saw generalised US dollar weakness and a concurrent strengthening of emerging market currencies. Looking forward, we think that much of that particular trend is played out and you're going to see probably more diversion between emerging market currency performance, and perhaps not a generalised trend of appreciation.
Commodities
We have avoided commodities in the recent past, and though we expect global growth will strengthen, in general terms we’re not hugely enthusiastic about commodities, especially the likes of gold where we expect weakness to continue as the macro environment improves.
“Turning to oil, we have had a long-term view that oil price will remain higher for longer; not necessarily as a result of stronger than expected demand, but because the cost of supply is going up over time. Optimists may point to the shale oil boom in the US, which has certainly boosted supply, but even so, the technology remains expensive so a reasonably high oil price is required. In addition, deep offshore wells represent expensive extraction. As for OPEC countries, they now require a higher oil price to balance budgets.
