Despite slowing growth in the emerging world, acceleration in activity in the developed countries is expected to drive a gradual recovery in the global economy during the second half of 2013. Policy responses by governments and central banks should ensure recovery becomes entrenched and the consensus forecasts a return to above trend global growth through 2014.
With economic recovery hopefully underway and the US Fed contemplating a gradual decline in bond purchases, the era of extraordinarily low bond yields is now over. In the US, 10-year yields have doubled from their lows and many forecasters expect yields to move above 3% during the next 6-12 months. While yields could ease back near term on any disappointment with the US recovery, the long term trend is for higher yields and probably negative returns in real terms. For some considerable time corporate bonds have provided, and still offer, better inherent value given the economic outlook and expected default rates, especially at the riskier end of investment grade and high yield. Even so, investors must be aware that these are very illiquid markets prone to high volatility. Emerging market debt remains overowned and it may take some time for the sector to stabilise.
Government and central bank action has helped lower perceived systemic risk and, while a near term slowing in Fed bond purchase may generate another bout of equity market turbulence, investors are beginning to rebuild equity weightings. At this stage of the cycle, however, investor focus should increasingly be on companies with exposure to growth markets be they cyclical, financial or defensive, and irrespective of country, sector and size. Yield will remain important in a low interest rate world and higher yielding stocks, albeit only those with growing dividends remain favoured by investors.
- US 10-year yields expected to move above 3% in 6-12 months
- Corporate bonds continue to offer better value
- Investors to rebuild equity weightings with focus on growth markets
