- The Fed has turned decisively hawkish in recent weeks amid rising inflation pressures. Money markets are pricing close to 250bps in rate hikes over the next 12 months. Does this still gel with
our constructive view on equities? - We believe it does. As long as the US job market holds up (job creation in March was strong), monetary policy stays accommodative (as it is likely to be throughout this year) and growth remains above-trend (as we expect this year), we believe the economic environment will remain reflationary this year, despite rising inflation and slowing growth.
- During reflation, history shows equities and commodities tend to outperform bonds. Hence, while market volatility is likely to stay elevated near term as the Fed raises rates, we would use the volatility to add to our equities and riskier bond exposures.