Risk-adjusted returns of global portfolios are going lower: Rolling risk-adjusted returns of a typical 60/40 global portfolio (FX hedged).
The correlation between equity and fixed income rising returns turning into positive
Market is not yet pricing the Fed rate hike cycle: FOMC views are slowly converging with expectation of markets
US inflation picking up: CPI spiking up towards 5 year highs
The fed hikes at current juncture are fairly generous: Asset prices are affected by the size of Fed hikes, as well as growth and inflation, Risk premiums, credit and equities should provide a cushion
Bond outflows are still a risk: Bond funds get sizeable outflows around Fed normalizations
Bond exposures cut and funds outperforming: Relative value hedge funds cut positioning into the selloff
The dollar gains have been sharp, yet it is not deemed as overpriced. USD REER closely linked to relative output gap
We look for modest overall returns accompanied by plenty of good alpha opportunities. Fed lift-off should not be disruptive for markets, but expect higher short-end US dollar yields and renewed US dollar strength: shift back to US dollar overweight. Better global economic growth should provide some good alpha opportunities: most notably, expect better growth to help sustain the outperformance of equities vs. bonds. Shift to overweight in base metals and cyclically-linked sectors like banks. Don't expect the DM bond sell-off to be repeated in H2, but still think bonds remain vulnerable.
