ECB moving on the path to raising interest rates

markets.

Instead, we think the greatest room for surprise sits in Europe, at the European Central Bank (ECB). We believe that, like the Fed, the ECB is on the path towards gradually tightening policy, first by bringing quantitative easing to an end and eventually raising interest rates. We believe there is much greater room to surprise markets here.

Historically, periods of a flat to weaker US dollar tend to be very good for emerging markets (EM). This is a key building block behind our preference for Asia ex-Japan equities, where we believe a weaker US dollar will continue to support flows into the region.

It is also a key factor behind why we are looking for opportunities in emerging market bonds, finding value in emerging market US dollar government bonds and Asian US dollar corporate bonds. Finally, a softer US dollar should help emerging market currencies, with growth oriented currencies like the Korean won benefitting more than yield-oriented ones like the Indian rupee.

What about commodities? How do you expect key commodities like oil and palm oil to perform? In the case of oil, with prices strengthening, should we start to relook the sector, or do you feel more consolidation needs to still happen?

Oil prices have good support, in our view, though given that prices have run in the recent past may suggest that a breather is in order. We have been constructive on oil prices through much of 2017 based on the view that the demand-supply gap would continue to close.

This trend appears very much on course, and one doesn’t have to look further than falling US oil inventories to see this in action. A weaker US dollar has also helped. However, this has coincided with many short-term, one-off events such as disruptions in Libyan supply and domestic unrest in Iran. Therefore, we believe oil prices are likely to be capped in the short term and a breather is in order before prices continue a gradual move higher.

We believe this view extends to related equity market sectors as well, with energy counting as one of our preferred sectors in the US. We believe a gradual increase in oil prices combined with support for procyclical sectors is likely to offer support.

What are the key indicators we need to look out for? To know that hey, these are signs the bull is coming to an end?

Unfortunately there is no magic bullet when it comes to forecasting the end of a bull market. Historically the end of business cycles has been very difficult to time, which is partly why we are very focused on getting the diversification decision right before try- ing to time the end of the cycle.

Having said that, there are some indicators which have a reasonable track record in offering guidance on when the bull market may be approaching maturity.

The yield curve (the gap between long-maturity and short-maturity government bonds) has traditionally been one of the best indicators of an economic and market peak.

Other indicators like the US leading economic indicator and real interest rates (ie. interest rates adjusted for inflation) are important.

Corporate earnings are also key, given any softening would take away what has been a key pillar of the equity market rally thus far.