The Asset Allocation Committee’s consensus remains cautiously positive for the coming year. For the first time in 18 months, however, we have started trimming risk in our views, advocating building dry powder ahead of potential short-term market volatility. The immediate hurdles that we believe investors need to clear include supply disruptions and rising input costs, tighter fiscal and monetary conditions, and threats to growth in China. But which markets do we favor, when core government bond yields remain so low?

Highlights of our fourth quarter 2021 outlook:

  • Our headline views show little change as we move into the final quarter of 2021, but the tone of our debate has arguably shifted more substantially than it has for a year, reflecting a growing consensus that we are getting closer to the point at which early-cycle recovery eases into mid-cycle expansion.
  • On a 12-month horizon, this still looks to us like an attractive environment for risky assets, but the inflexion point is already proving particularly volatile: we think it is prudent to position still more defensively in the short term, to be better able to clear the immediate hurdles.
  • Our view on cash is upgraded to neutral, we are marginally more favorable on select Hedged Strategies, and our view on U.S. Large Caps is downgraded to underweight on valuation risk.
  • We remain overweight in our views on high yield corporates and emerging markets, but that is likely to be under closer scrutiny over the coming weeks.
  • Investors who can clear the immediate hurdles without tumbling are likely to be in a much better position to take advantage of the potential opportunities of a more settled mid-cycle expansion, which is supported by very strong economic fundamentals.
  • Up for Debate: All Change in China?
  • Up for Debate: Inflation—Not a Question of Transitory Versus Structural