# Improvement in financial conditions can continue Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2017-03-22 Category: BUSINESS Category URL: https://financedigest.com/category/business Meta Title: Global Economy Update: Positive Outlook & Market Signals Meta Description: Learn about the positive global economic outlook with insights from Investment Director Michael Stanes at Heartwood Investment Management. Stay informed on URL: https://financedigest.com/improvement-in-financial-conditions-can-continuehtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/dsc-2872-970-1736844058235-compressed.jpg) By **Michael Stanes,** Investment Director at Heartwood Investment Management The global economy is presenting a positive picture with both developed and emerging markets contributing to growth. The improvement in global conditions has coincided with rising financial market confidence. We appear to be in a steady state of equity markets grinding higher, gently [rising bond yields](https://www.financedigest.com/german-bond-yields-rise-after-schnabel-fuels-inflation-worries.html "German bond yields rise after Schnabel fuels inflation worries") and low volatility. Recognising that we are in an unusually extended market cycle, with [markets now eight years on from their Global](https://www.financedigest.com/mechanical-and-electronic-fuzes-market-one-the-most-booming-industry-in-upcoming-years-due-to-global-demand-in-industry-by-2027.html "Mechanical And Electronic Fuzes Market| One the Most Booming Industry in Upcoming Years Due to Global Demand in Industry by 2027") Financial Crisis lows, we believe that the improvement in financial conditions can continue in the near term, driven by excess liquidity, still dovish central banks and an improving global backdrop, with inflation not expected to run into the danger zone. That said, we acknowledge that valuations across developed market equity indices are looking more expensive and credit spreads are at historic lows (the [yield difference versus the equivalent maturity sovereign bond)](https://www.financedigest.com/sovereign-bond-yields-not-yet-reached-a-summit-reuters-poll.html "Sovereign bond yields not yet reached a summit – Reuters poll"). We are therefore comfortable with the current moderate risk overweight, but have little inclination to add further to risk levels. **Equities**: Notwithstanding the [positive and improving growth outlook](https://www.financedigest.com/agriculture-container-and-tank-cleaning-equipment-market-witness-positive-growth-outlook-during-forecast-2028.html "Agriculture Container And Tank Cleaning Equipment Market Witness Positive Growth Outlook During Forecast 2028"), our view remains that a modest overweight in equity is appropriate. The ‘reflation trade’ continues to dominate the market narrative, despite the [bond market](https://www.financedigest.com/britains-bond-market-turmoil.html "Britain’s bond market turmoil") showing some scepticism that the growth momentum can be maintained. [Valuations and performance prevent a more positive stance toward](https://www.financedigest.com/online-food-delivery-services-market-will-reach-a-valuation-of-over-us-4212-6-mn-towards-2029-end-fmi.html "Online Food Delivery Services Market will Reach a Valuation of over US$ 4,212.6 Mn towards 2029-end: FMI") equity overall, particularly with event risk in Europe and some uncertainty around the pace of US policy moves. We retain our positive view on US equities beyond the immediate future, maintaining our slant to cyclical [stocks](https://www.financedigest.com/mutual-funds-vs-stocks-which-is-better.html "stocks"). We have also added to positions in healthcare, where we see long-term [opportunities to benefit from ageing demographics and new therapeutic](https://www.financedigest.com/rna-based-therapeutics-and-vaccines-market-trends-on-going-demand-opportunities-segmentation-and-forecast-till-2026.html "RNA based Therapeutics and Vaccines Market Trends, On-going Demand, Opportunities, Segmentation, and Forecast till 2026") discoveries. Our overweight in European equities remains a contrarian trade, but we believe this region will benefit from a corporate earnings recovery as fundamentals improve. Similarly, we [expect these trends to also support Japanese equities](https://www.financedigest.com/citi-expects-global-equities-to-rally-18-by-end-2023.html "Citi expects global equities to rally 18% by end-2023"). We remain underweight in UK [equity and believe it is too early to repatriate assets](https://www.financedigest.com/decoding-balance-sheets-analyzing-assets-liabilities-and-equity.html "Decoding Balance Sheets: Analyzing Assets, Liabilities, and Equity"). In [emerging markets](https://www.financedigest.com/surgical-masks-market-emerging-trends-and-will-generate-new-growth-opportunities-status-2030.html "Surgical Masks Market: Emerging Trends and Will Generate New Growth Opportunities Status 2030"), we maintain our overweight position but would not add to it at this point, given its recent resilience and possible risk of a trade policy shock out of the US. **Bonds**: Interest rate policy divergence is emerging as a stronger theme in [developed sovereign bond markets](https://www.financedigest.com/ventricular-restoration-systems-market-development-history-current-scenario-industry-insights-2030.html "Ventricular Restoration Systems Market Development History, Current Scenario & Industry Insights 2030"). Over the last month, US [treasury yields](https://www.financedigest.com/world-equities-fall-u-s-treasury-yields-rise-after-hawkish-fed.html "World equities fall, U.S. Treasury yields rise after hawkish Fed") have drifted higher on the re-pricing of interest rate expectations, while UK gilts, in particular, have outperformed despite a backdrop of increasing inflation. We believe that being short duration remains appropriate in the current environment of improving [global growth](https://www.financedigest.com/global-growth-headed-down-as-inflation-surge-to-endure.html "Global growth headed down as inflation surge to endure") and reflation. Credit [markets should continue to be supported](https://www.financedigest.com/engineering-pipe-hanger-and-support-market-estimates-the-to-expand-at-around-4-8-cagr-from-2021-to-2031-2.html "Engineering Pipe Hanger and Support Market Estimates The To Expand At Around 4.8% CAGR from 2021 to 2031") by improving economic fundamentals, although supply has weighed on some parts of the market more recently. In a [Fed tightening](https://www.financedigest.com/fed-delivers-small-rate-hike-opens-door-to-pause-in-tightening-cycle.html "Fed delivers small rate hike, opens door to pause in tightening cycle") environment, leveraged loans have seen notable outperformance. We continue to have select exposure to shorter-dated investment grade corporate bonds, specialist lenders and [emerging market](https://www.financedigest.com/allergy-immunotherapy-market-emerging-players-may-yields-new-opportunities-2017-2025.html "Allergy Immunotherapy Market: Emerging Players May Yields New Opportunities 2017-2025") sovereign debt. **Property**: UK [property developers](https://www.financedigest.com/property-development-exit-loans-what-they-are-how-they-work.html "Property Development Exit Loans: What They Are, How They Work") and listed vehicles have performed well of late, supported by better than expected fourth quarter results and the rally in UK gilt yields. Nonetheless, there are few catalysts that we can see in favour of this market over the [medium term](https://www.financedigest.com/ab-inbev-aims-for-core-profit-growth-of-4-to-8-over-medium-term.html "AB InBev aims for core profit growth of 4% to 8% over medium term"), given uncertainty around Brexit, and we believe it would be too soon to add. Our underweight in UK [commercial property](https://www.financedigest.com/rouzbeh-pirouz-on-investing-in-commercial-property-as-the-uk-emerges-from-the-pandemic.html "Rouzbeh Pirouz on Investing in commercial property as the UK emerges from the pandemic") remains intact based on the supply outlook, especially in the South East. Across sectors, we continue to seek income [opportunities in the industrials](https://www.financedigest.com/ma-in-the-healthcare-industry-trends-opportunities-and-regulatory-considerations.html "M&A in the Healthcare Industry: Trends, Opportunities, and Regulatory Considerations") and offices. On a regional basis, we are invested in cities outside of London, which are less exposed to the ‘Brexit’ fallout. Outside of the UK, we are also looking at opportunities in the US REIT (real estate investment trust) market, although we remain [wary of the impact of the Fed’s more hawkish](https://www.financedigest.com/marketmind-o-canada-markets-wary-of-fed-hawkish-surprise.html "Marketmind: O Canada! Markets wary of Fed hawkish surprise") stance. **Commodities**: Until mid-March, the [low volatility and tight trading range of the oil price](https://www.financedigest.com/oil-prices-ease-to-trade-near-2-month-lows-on-china-demand-fears-dollar-strength.html "Oil prices ease to trade near 2-month lows on China demand fears, dollar strength") have been noteworthy this year and we did not expect this situation to last. Concerns around inventory levels and the discipline of OPEC producers keeping to agreed limits are now [testing the market’s](https://www.financedigest.com/mycology-immunoassays-testing-market-growth-share-industry-dynamics-top-trends-and-regional-analysis-forecast-to-2027.html "Mycology Immunoassays Testing Market Growth Share, Industry Dynamics, Top Trends and Regional Analysis Forecast to 2027") resolve, leading to the oil price sliding to a three-month low. Despite the sell-off, we continue to expect that an improving [global economic](https://www.financedigest.com/putin-says-west-is-triggering-a-global-economic-crisis.html "Putin says West is triggering a global economic crisis") environment, reflation and a tighter supply/demand balance will ultimately be supportive to commodities this year. Direct access to this [market is through owning futures](https://www.financedigest.com/title-n95-mask-market-future-is-set-for-massive-growth-with-high-revenue.html "N95 Mask Market Future is Set for Massive Growth with High Revenue") contracts rather than the physical assets and while the risk/return profiles are looking more attractive across some parts of the complex, they are not yet at levels where we are ready to invest. We have, though, a position gold in some strategies for diversification. **Hedge funds**: While we have held a limited allocation to hedge funds in recent years on concerns around performance, we believe that increasing interest rate divergence should [create more opportunities](https://www.financedigest.com/tire-materials-market-to-create-an-incremental-opportunity-of-us-99-99-bn-by-the-end-of-2028-fmi.html "Tire Materials Market to create an incremental opportunity of US$ 99.99 Bn by the end of 2028 – FMI") going forward. Our preference remains for macro/CTA strategies, but we are also taking a more positive view on equity [hedge strategies](https://www.financedigest.com/fx-hedging-strategies-to-protect-your-business.html "FX hedging strategies to protect your business"), given the greater likelihood of increased stock dispersion (i.e. between [winners and losers), as well as credit long/short strategies](https://www.financedigest.com/the-pound-gilts-and-stocks-likely-winners-and-losers-from-uk-budget.html "The pound, gilts and stocks: likely winners and losers from UK budget"). **Cash**: We have reasonable levels of liquidity across our portfolios both in cash and short-dated bonds, which we are ready to invest as and when we see specific opportunities. [Market volatility](https://www.financedigest.com/analysis-oil-prices-turn-more-volatile-as-investors-exit-the-market.html "Analysis-Oil prices turn more volatile as investors exit the market") remains low, a situation unlikely to persist throughout 2017. --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---