More 'forceful wage inflation picture' is emerging

Without a perkier inflation backdrop, both central bankers and bond markets can likely relax for the moment.

MUCH of the fixed income universe continues to deny valuation gravity, even factoring in the ongoing correction. Without a perkier inflation backdrop, both central bankers and bond markets can likely relax for the moment.

However a more forceful wage inflation picture is starting to emerge in the US and the UK, which may be starting to encourage the bond market to reappraise its currently benign view of the path of interest rate rises in both regions.

Of the big sovereign markets, we think the euro area can continue to relatively outperform in what we still think will be a testing time for most bonds: we expect recent gains will eventually be reversed.

A reappraisal of the path of interest rates in the US and UK by the bond market could see a temporary reduction in global risk appetite, which could see spreads to riskier fixed income instruments widen from here. We suggest keeping duration short.


We see the US economy as capable of digesting higher interest rates and suspect that the US’s continued economic warmth will spread, with varying lags, to the rest of the world.

Our favoured developed equity regions remain for the moment the US and Europe ex-UK, with the global growth backdrop equally important for the latter as the more subdued, but unevenly improving domestic backdrop. Within Emerging Markets Equities, Asia remains our preferred region, with Korea, Taiwan and China our highest conviction country bets on a strategic basis.

For sectors, we suggest overweighting those areas most positively correlated with rising interest rates and a steepening yield curve, namely banks and life assurers. Higher yielding equities may be vulnerable as yields on other safer asset classes become more appealing. Those sectors also likely to benefit from the improving capital expenditure backdrop, such as industrials and technology, are also worth overweighting.

Foreign exchange

We continue to favour USD and expect it to outperform most other G10 currencies in 2015 as monetary conditions in the US and euro zone continue to diverge.

We remain cautious on emerging market FX and the EUR, though the still strong consensus on the latter suggests some circumspection is merited. News on Greece, one way or the other, will clearly continue to be influential.


Our tactical underweight remains in place with US monetary normalisation and a less resource hungry China both expected to be headwinds for a while yet.

Investors are likely best served by tilting their commodity exposure towards oil and away from gold where possible, with the latter still particularly vulnerable to impending US interest rates.

Jonathan Dobbin is head of wealth and investment management NI at Barclays. He can be contacted on 028 9088 2925 or email jonathan.dobbin@


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