More than six years into the recovery, investors should expect lower returns going forward. Valuations in both equities and fixed income are now relatively expensive, and evidence is accumulating that the recovery is becoming self-sustaining, pointing to less supportive monetary policy.
Nevertheless, if growth rebounds as we expect in the second half of the year, equities should perform reasonably well over the next few months, especially in Europe and Japan, where we expect earnings growth to be strong. We would also overweight cyclically sensitive assets (such as EM equities and base metals), regions and sectors.
We do not expect a first Fed rate hike or the Greek crisis to derail the recovery in economies or financial markets. And while a serious setback in China would have lasting effects on the world economy and financial markets, that is not likely to happen this year.
As the divergence in policy between the Fed and the ECB develops, we expect the euro to resume falling, eventually breaking parity.