Turning economic cycle favours bonds over equities

We think that the darkening prospects for the global economy favour high-grade bonds over equities this year. Our forecasts are for the Chinese and euro-zone economies to lose more momentum, and for a sharp slowdown in the US economy. This will hit corporate earnings and stock markets in our view. We suspect that it will also halt, or reverse, monetary policy normalisation in most cases. As a result, we think that the yields of developed market government bonds will generally fall further, where they aren’t already ultra-low. Finally, we expect this backdrop to boost demand for safe havens, including the US dollar, the Japanese yen, and gold.