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The third quarter was fruitful both for risky assets and carry collection. Despite the fluctuation in core rates during the quarter, the summer lull proved beneficial for investment grade and high yield bondholders.
On the equity side, emerging markets led the outperformance race with almost double-digit returns, followed by US and Eurozone markets. In the commodities world, crude oil and industrial metals delivered the best result within a weakening US dollar environment. The nine-month-long downtrend in the greenback offered emerging markets and commodities the opportunity to shine.
We expect inflation to pick up in the US on the back of weakening currency.
The highlight of last quarter – and most probably a theme that will keep investors on their toes – is the renewed hawkish rhetoric and rates normalisation. The recent actions, and intentions, by major central banks have left bond investors questioning the asymmetric risk return payoff of their portfolios. However, benign inflation continues to provide some comfort for those ‘sleepwalking into the benchmark trap’. Going forward, we expect inflation to pick up in the US on the back of weakening currency with significant implications for the US curve and global core rates. Although it is premature to push the panic button, we might be a couple of quarters away from the turning point.
Despite North Korea being the latest Sword of Damocles for financial markets, we retain a positive view on equities for the final quarter. From a regional perspective, we have a preference for Europe, US and Japan.
Global consumer spending should return to strength, feed into equities and higher valuations.
Earnings growth has proven to be the catalyst for the latest solid performance and since we expect global consumer spending to return to strength, this should feed through into equities and higher valuations.
China’s relevance for commodities, global growth, and the whole Asian region is important.
Finally, I would mention the increasing role of China in the global arena, both economically but also, increasingly, politically. The strategic plan by the Chinese leadership and the transition from a domestic debt-based growth engine into an open markets global player proves to be of outmost importance. China’s relevance for commodities, global growth, and the whole Asian region becomes more important as it promotes an innovation agenda and takes steps to strengthen domestic consumption. The emergence of China as a global power is not a new theme, but the diminishing influence of the US make this more relevant than ever.
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