China is in AI pole position

China has grown to become the world’s second largest economy and is today contributing to 19 per cent of the world’s GDP growth. The enormous onshore Chinese market has been gradually allowing foreign investor access through various channels as the government takes steady steps to liberalise its economy and improve its financial system. Global index providers for both bonds and equities are now beginning to add Chinese onshore securities into their indices, thus prompting global investors to rethink asset allocation strategies.

Market performance in 2018 has been poor. This has come as rising US inflation has exacerbated concerns over tightening Fed policy, pushing US Treasury (UST) yields higher. Meanwhile, DM activity growth lost momentum at the start of the year just as rising political uncertainty (eg Italy) and global trade tensions came to the fore. Amid a stronger US dollar, this has helped fuel anxieties over many exposed EMs.

The outlook around global trade policy is very unclear, with the risk of a further escalation in tensions. Positively, however, measures announced thus far should have a small economic impact. For the time being, global growth remains robust and we think the risk of recession is very low. We therefore maintain our pro-risk positions in multi-asset portfolios, with a preference for global equities and EM assets which offer us the best risk-adjusted prospective returns, in our view.

We also maintain our underweight positioning in DM government bonds, which continue to offer low sustainable returns and find themselves in an unfavourable environment (building cyclical inflation and central bank policy tightening). However, we think the relative attractiveness of USTs has improved amid higher yields. Finally, corporate bond valuations still offer us a slim margin of safety against negative shocks, consistent with an underweight positioning in portfolios.