For some, the consequence of all this for the level of asset prices  is yet another reason for concern as they are eager to warn for new bubble blowing in financial markets. I remain sceptical, however, to lean too much on this “bubble”-view. Bond yields are indeed extremely low now and I do see yields drifting higher during the year, but I also think it is unlikely to see them jumping higher in a destabilizing way for as long as QE is in play in most DM regions and the Fed remains dovish.  Moreover, the absolute or relative valuation of other asset classes are certainly not in extreme territory and provide therefore little guidance for asset class returns over the next 6-12 months.

Finally, and most importantly, I feel that in complex adaptive system such as the global economy there is always a degree of self-organisation that creates strong path dependencies for future outcomes. This explains the need to focus on feedback loops between the real economy and markets, both either positive or negative. An assessment of the evolution of the current path of the global economic system will provide a much more reliable guidance on asset class returns than most valuation metrics. Especially if not only “fundamental” steps are captured by this analysis, but also “behavioural” moves by international investors are brought into the equation.

My best effort to assess all these elements influencing the most likely path ahead of us suggests that we are certainly on a road to somewhere in the global economy. The breath of the recovery and its traction in global labour markets actually makes it the most sustainable recovery path since the Great Financial Crisis. Temporarily shifts in investor sentiment and positioning will continue to create pockets of volatility. At this time, however, this is only a reason to be less aggressive than we would be based on fundamentals alone. It is certainly not yet a reason to move to a defensive allocation stance and therefore we remain positive on equities, real estate and fixed income spread product. At the same time, we have limited appetite for government bonds where the trade-off between further positive returns and potential downside seems clearly tilted to the downside.      


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