The shape of the economic recovery, rising inflation and the expected unwinding of stimulus measures appear to be the main themes for the coming quarter. Economic recovery, inflation and higher interest rates are, in principle, favourable for relatively risky asset classes, such as shares. In contrast, these developments will not favour government bonds. We expect corporate bonds, like shares, to benefit more from the economic recovery than government bonds.
On the other hand, the real estate woes in China, lagging vaccination rates in emerging markets and the possible reduction of government support in developed countries may cause more volatility in the stock markets.
Since equity prices have fallen somewhat since last quarter, shares have become relatively cheaper and government bonds have become more expensive. So, given rising inflation and higher interest rates, we have a slight preference for shares over government bonds. For this reason, we will maintain our slight overweight in this asset class in the coming quarter.