The payoff from unprecedented amounts of QE has been disappointing in terms of growth, while the road back from this policy is full of unknowns. Our base case assumes a slow, rather than rapid, return to normalisation.
Since June, economic news in the US and Japan has come in broadly in line with our base case expectations, and we have kept our 2013/14 GDP forecasts largely unaltered, aside from a small downgrade to the US for 2013.
We have raised growth forecasts for the eurozone, China and UK, in response to stronger than expected survey and official data.
Our base case for global growth, inflation and central bank policy still favours riskier assets in our asset allocation mix. A combination of modest growth, combined with emergency-level interest rates, forms the main economic plank of our strategic view.
Clear priority of asset classes
QE continues to distort fair values across many asset classes, although we believe the issue is most acute in fixed income, and in particular in so-called safe haven government debt, albeit that recent market moves make this distortion less acute than before.
Equity valuations look reasonable, as opposed to expensive, with the prospect of some earnings growth and a modest rather than sharp rise in bond yields from current levels.
Investment grade credit looks less attractive than equities, given the prospect of a further rise in government yields and spreads now close to post-crisis lows.
Though high yield credit spreads have also fallen, this asset class should benefit from a gradual economic recovery, a modest rise in government bond yields and very attractive income characteristics.
