Janus Henderson: Return of 'normal' in Multi-Asset

QE peaks, volatility troughs

We see the recent upshift in financial market volatility as a return to more normal market conditions, following one of the most tranquil years in market history. In our view, the hefty US$2,000bn injected into financial markets by key central banks in 2017 was a major factor shaping the unusually benign, high-return, low-volatility market environment. From here, with the global economy continuing to heal, central banks will be slowly guiding monetary policy back towards more normal settings. It seems likely that 2017 could be a peak year for QE (quantitative easing) and a multi-year low for market volatility.

Looking to buy equity dips – sell bond rallies

Despite the choppy start to the year in global equities, we still favour the asset class strategically and see scope for positive returns in 2018, while our constructive outlook remains intact. Our core view here is that the global economic expansion has the potential to be unusually long by historical standards, underpinned by historically low interest rates. We believe the scale of monetary tightening that we anticipate from global central banks should not threaten this market-friendly scenario.

In fixed income, we still struggle to find value, given that both real government bond yields and credit spreads remain exceptionally low by historical standards. While our general stance in equities is to buy dips, as we did in recent months, we will keep leaning towards selling rallies in fixed income until valuations become more attractive.

Watching inflation

The most credible overarching threat to our long-cycle scenario would be if inflation expectations lifted enough to compel central banks to normalise monetary policy more urgently. While recent data still support our view that the recovery in global inflation will be gradual, we continue to monitor developments on this front closely, as a sustained increase in inflation expectations could be a game-changer for financial markets.

Beyond these dynamics, the threat of a continued escalation in global trade tensions looms as the other big threat to economic and market stability. While it remains difficult to predict how these politically-charged negotiations will evolve, our core view, for now, is that economic logic and corporate lobbying will ultimately guide leaders away from outcomes that damage the global expansion.

Opportunity in volatility?

Our central scenario is that an unusually long period of economic growth can sustain unusually long bull markets. However, there are sizeable risks to this view and they are hard to calibrate, given the idiosyncratic nature of the current environment. Even if things work out well, we expect only modest returns from most asset classes this year. Market volatility should give us some opportunities to add value in both asset allocation and fund selection.