Strong growth and a sustained pickup in inflation this year are forecast by Aviva Investors’ second-quarter outlook.
The firm has raised its global growth expectations to close to four percent, the fastest rate of increase in seven years. The move was driven mainly by an upward revision in the outlook for the US, although prospects for the UK, Eurozone, Japan and Canada are modestly higher. Stronger wage growth and inflation are expected to follow. Aviva Investors also predicts inflation will reach two per cent in advanced economies in 2018.
Most advanced economy central banks are expected to begin or move towards tightening over the next year. The Federal Reserve is expected to raise rates four times, with a further four hikes on the cards for 2019. The pace is more rapid than expected at the end of last year and would take the policy rate to over three percent, according to the firm.
As markets absorb steps towards normalisation, more volatility will emerge and risk premia will re-price to better reflect fundamentals. Near-term risks have increased with the rise in trade tensions. While the expected scale of US tariffs will probably not be enough to have a material economic impact at national or global level, the recent sell-off in risk assets demonstrated market concern over trading relations.
Looking further ahead, risks are more likely to focus on debt markets. Duration will be challenged by tighter monetary policy, and valuations in corporate credit are already stretched.
“A higher volatility regime is arguably a good thing for global markets. The robust growth backdrop, which is expected to continue, is helping markets to stand on their own two feet again. The almost uninterrupted rise in equity markets, accompanied by extremely low volatility, has been less healthy. We think that global markets have regained some ability to price risk. There is some differentiation to be made across asset classes once more,” commented Ahmed Behdenna, senior strategist at Aviva Investors.
The firm has made a small reduction in equity exposure, although remaining generally constructive on global equity markets. It revised US underweight to neutral; maintains underweight UK; and is aggressively underweight duration in developed markets. Aviva also favours emerging market equities and local emerging market debt, and upgraded hard currency EMD to neutral.
Aviva Investors provides asset management services to both Aviva and external clients, and currently manages over £350 billion in assets.