Investment horizon is clearing

The economic outlook is looking increasingly settled. Monetary policy is changing at a firm and gradual pace, and the reaction to North Koreas nuclear test announcement demonstrates that it would take a new dimension of threat if investors are going to be deterred from global equities.

According to Barings Asset management, the markets seem to have settled into the view that the Fed will be on pause for some time and rate cuts are not on the cards.

Percival Stanion, Barings head of asset allocation, said: �We expect the Fed to remain vigilant on the inflation front. Although US housing is very weak, jobs growth and income gains are still healthy and we believe there is no reason to expect more than a modest slowdown in consumer spending.�

Barings research reveals that the monetary environment is likely to remain relatively benign. In Europe the ECB has softened its rhetoric and indicated that the pace of interest rate rises is likely to slow after the next increase.

The Bank of England is expected to raise rates again before Christmas but then pause, while rate rises in Japan are likely to be very gradual.

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Stanion said: �None of the major central banks have an overt tightening policy which makes for a much clearer global investment horizon. Elsewhere in the world there may even be the possibility of an ease in policy, notably in Brazil, Thailand and perhaps even Korea.

�On the inflation front we believe we have seen the worst of the pressures from commodities; the pull back in oil and energy prices has been a welcome development. However with activity levels still high across the globe it will probably take some time before we see consumer headline inflation figures fall significantly.�

Turning to markets, Barings believes the major risk to fixed income is a likely rise in real yields. Real yields are at very low levels by historical standards given the general rally in bond markets and they are expected to rise very slowly as savers demand better returns to compete with other investments.

Although US bonds have some appeal, Japanese and European bonds remain unattractive and aside from some selective opportunities in emerging markets, corporate bonds remain expensive according to Barings. Equities remain attractive relative to bonds and cash across most markets.

Stanion said: �We have upgraded equities in multi asset accounts to a modest overweight. Market responses to the tensions with North Korea indicated that it would take a new dimension of threat to unnerve investors which leaves us with equity markets looking attractive on most comparisons with bonds and cash. If growth proves robust, margins might well hold their recent record levels. At the same time the inflation threat and the prospect of a harsher monetary regime is fading.�

Within equities Barings have upgraded their score on Singapore but downgraded their weighting in Latin America over concerns about the impact of weaker commodity prices. Barings remains overweight in Europe and the UK given the attractive arbitrage between the cash flow yield on the equity market and the low cost of corporate borrowing.

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