The economic recovery that began in May is set to continue throughout the rest of the year and into 2021, according to Aviva Investors' Michael Grady, who said further waves of Covid-19 across the world should be "successfully countered" by limited and targeted restrictions, thereby avoiding the need for full lockdowns.
The head of investment strategy and chief economist believes potential headwinds on the horizon for the global economy have reduced significantly since the summer, while the upside case will only be enhanced by "the eventual development and distribution of effective vaccines in early 2021", alongside the continuation of ultra-loose monetary policy and fiscal support from central banks.
However, he pointed out an economic revival is dependent on the continuation of such policy and "generous" fiscal support for both businesses and workers.
"If sustained, the combination of loose monetary policy - which is increasingly geared to achieving higher inflation than in the past decade - and expansionary fiscal policy has the potential to bring long-lasting material changes for economies and global financial markets," he said.
As such, Grady has taken a more positive view on risk assets, which he is expressing predominantly through credit markets. The investment strategy team is specifically overweight global high yield debt and US investment grade credit, while its previous underweight to global equities has moved towards a more neutral positioning.
"Relative valuations and the form of the cyclical recovery favour Europe and emerging markets over the US and Japan," Grady explained. "Meanwhile, the decline in sovereign bond yields globally makes them less attractive, especially as an effective risk-reducing asset in our portfolios. While we have a neutral view overall, we balance overweights in the US, Italy and Australia with underweights in core Europe."
The most significant change in the team's asset allocation view, according to the chief economist, is that it has moved to an underweight position in the US dollar relative to other key G10 currencies, where it prefers to be overweight the euro and the yen.
"While there is considerable uncertainty about timings, the contours of a post-Covid 'new normal' should come into sharper focus in coming quarters," Grady added.