The outlook for growth at the global level and across globally important countries and regions we see as subject to fairly normal, bell-shaped distributions. But this fairly normal outlook reflects a very unusual level of central bank and other policy interventions. Market valuations range from fair to stretched and remain highly influenced by central bank interventions. As the Federal Reserve looks to unwind stimulus and other countries, notably Japan, get further and further into extreme intervention territory, the margin for error is thin. The experience of the past years has shown that it does not take much in terms of policy actions and mistakes to prompt repricing in markets. While maintaining overall fairly cautious portfolio positioning, we will seek to benefit from periods of volatility in which assets have the potential to cheapen significantly. To be in a position to benefit, we will need careful portfolio construction and rigorous risk management of our positions.

Very selective on the eurozone

The eurozone secular outlook in particular is subject to a series of risks – economic, political and regulatory – and significant uncertainty over the reliability of property rights and the protection of the rule of law (recent examples of the latter include Portugal and Austria). In recent years we have favored eurozone markets with a secular bias to be overweight but, at current valuations and given the risks to the outlook, we expect to be cautious and very selective on eurozone holdings in our portfolios.

Look for opportunities in emerging markets

Two of the key challenges to emerging markets in the past few years have been the strength of the U.S. dollar and the weakness of commodity prices. Our secular outlook of broad stability for the U.S. dollar, in part owing to China’s constraint on Fed policy tightening, along with commodity markets that have largely repriced to China’s reduced and less commodity-intensive growth path suggests that two key negatives for emerging markets have been removed. While there are of course country-specific challenges in emerging markets, and liquidity conditions have deteriorated, we will look on a country-by-country and sector-by-sector basis for good investment opportunities in emerging markets.

Bottom-up over beta

In credit markets, where market beta valuations look fair but not cheap, we will seek to add value using our global team of credit portfolio managers and credit analysts, focusing on picking the winners and avoiding the losers in the capital structure and investing in industries and companies where we perceive pricing power and barriers to entry.

Scour the world and diversify

We will scour the world for investment opportunities across sectors, using our global team of 295 portfolio managers and analysts. We will look to take a wide range of diversified positions and to identify attractive liquidity and complexity premiums – and we will strive in portfolio construction and risk management to guard against excessive correlated risk in our portfolios.

Guard against the right tail

As well as seeking to protect against left tail risks, we need to seek to protect against right tail risks, given the possibility of better-than-expected macro outcomes – notably inflation, which, along with default risk, constitutes in our opinion the biggest risk to fixed income portfolios, particularly at very low levels of real and nominal yields. Given the extent of increasingly experimental monetary policies in place globally (with the potential for more to come), all with a core objective of boosting inflation rates, we find inflation protection is attractively priced. Different countries face a range of potential inflation outcomes, but we see U.S. Treasury Inflation-Protected Securities (TIPS) as offering both good value and valuable protection against the possibility of higher inflation in the U.S. Risk management will be crucial to investment outcomes over the secular horizon.

Key takeaways

Rising Risks?


Investment Risks

Left tail risks are building, with consequential implications for portfolios.

• In the absence of structural reforms, we are approaching the limits of central bank policy.
• Increasingly experimental policy is creating greater uncertainty and stretching valuations.
• Unsustainable debt levels mean that long-term risks of capital impairment or inflation are rising.
• Political uncertainty is increasing.
• Greater regulation and related reduced transactional liquidity are enhancing local market volatility.

… And Responses