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News from the global manufacturing sector remained generally upbeat in December. The debt crisis in Europe continued to simmer but did not prevent equity markets from strengthening. Inflationary pressures in major emerging markets are on the rise. The authorities are doing as little as possible so that the robust growth is not affected, but further moderate tightening measures are inevitable in the coming months.
We continue to take a positive view on most risky assets but prefer only moderate overweights, due to the growing tensions in the eurozone and the ongoing monetary tightening in emerging markets.
In the eurozone bond market, the spreads on the bonds of peripheral countries have settled down again, albeit at higher levels. As on the previous occasions that a flare-up in the eurozone debt crisis has died down, it somehow feels as if the problem has become less acute. It has not. No structural solution for the underlying problems has so far emerged. This means that the issue will resurface before long.
One of the key risks for real estate is a continued rise in bond yields. Given the commitment of central banks to support the economy as long as is necessary, we feel the risk of a substantial rise in bond yields from this level is limited. Real estate’s valuation is somewhat ahead of the historical average relative to equities, but not so significantly that we expect real estate to underperform.
On a three- to six-month horizon, we expect equities in North America, Europe and the Pacific all to lag emerging markets. The economic outlook for emerging markets is good, while valuation is more or less in line with developed markets’. However, momentum is stronger and the long-term economic outlook is less depressed by aging or government debt.
We continue to expect cyclicals to benefit in the current economic cycle, especially consumer cyclicals and industrial goods.