No more taper tantrums

ARE we experiencing a new conundrum in financial, and especially bond markets? While common wisdom at the turn of this year suggested that both equities and long-term yields should trade higher, developed stock markets have so far stalled while commodities or India's and Indonesia's (two out of the so called "Fragile 5") exchange markets posted the best performances year-to-date. Even less expected is the behaviour of US long-term interest rates, which fell from 3 per cent at the end of December to a 2014 low of 2.58 per cent on May 2.

Like many, we advocated that equities were the best space to be this year and, despite a shaky start, we still think so. Unlike many, we were and remain supportive on emerging equities as a whole and Asia in particular. Our risk on global commodity exposures at the end of 2013 has been rewarded and we were among the few who didn't fear another repeat of last year's correction in global bond markets when initial tapering discussions took place. This explains - in part - the relatively significant exposure of our portfolios to fixed income in general, and credit and duration risks in particular. The main reason lies in the way we map out our portfolio construction and asset allocation for the benefit of our clients.

Global growth suffered from a sharp slowdown in the first three months of 2014, weighing on corporate results and equity performances. The US experienced a temporary downturn worsened by unusual weather conditions and growth in many emerging economies continued to slow under a combination of monetary tightening and structural rebalancing towards less leveraged, less investment and export-driven economic structures.