Global Market outlook
Despite all the shocks, worries and uncertainties in the first quarter, global equities still returned 4.4% (MSCI AC World Index, in USD). Annualised, this would produce a return of 18%, in line with our forecast of high-teens returns for the year. Markets are bouncing back from a mild setback yet investors are hunting for reasons to ignore the improving trend.
With strong earnings growth, modest valuations and under-invested institutional and private investors, we think it will take at least one significant new shock to prevent equities rising further in the second quarter and in the rest of the year. On the positive side, growth in corporate earnings is likely to continue to exceed forecasts with margins in developed markets unlikely to peak until unemployment has fallen substantially while the relative performance of emerging markets is recovering strongly from its recent setback.
Meanwhile, government bonds have performed better than we expected though developed market yields have still risen, especially in Europe. Corporate bonds, especially high yield bonds, Asian government bonds and emerging market debt have produced good returns enabling us to produce reassuringly positive returns from bonds overall. The outlook for bond returns may be only modest, but we think that claims that a bubble in valuations is about to implode continues to be far too alarmist. Our skepticism at the start of the year about the prevailing bearishness of the yen and euro relative to the dollar has been fully vindicated.
We are confident that current affairs are likely to bring much more to worry about in the rest of the year but
expect investment markets, especially equities, to continue to produce solid returns...
