Resilient economic growth and strong corporate earnings continue to support global equities, but rising government bond yields are becoming the key risk for investors, according to Schroders.
The asset manager has maintained a positive stance on equities despite higher-for-longer interest rates, arguing that recent increases in bond yields reflect stronger nominal growth rather than a deterioration in economic fundamentals.
“Growth continues to be resilient, particularly in the United States, and we continue to see earnings momentum, which supports a positive view on equities,” said Ugo Montrucchio, chief investment officer, multi-asset at Schroders.
The firm continues to favour equities, commodities and emerging markets, while downgrading government bonds to a neutral position and maintaining a negative view on corporate credit.
Schroders believes robust earnings growth remains the most important support for equities, particularly in the US technology sector where AI-related investment continues to underpin profits.
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The firm retains a positive view on US equities through the Nasdaq, arguing that earnings delivery continues to justify elevated valuations.
It also remains constructive on Europe, citing supportive earnings trends and exposure to industrial activity and technology adoption.
Within emerging markets, Schroders upgraded its outlook to positive, highlighting improving earnings revisions and continued benefits from technology investment.
Taiwan was identified as a preferred route to access the AI theme, with earnings momentum extending across a broad technology ecosystem.
Bond yields become the key risk
While Schroders remains constructive on risk assets, it warned that a more disorderly rise in long-term bond yields could challenge that outlook.
Higher yields have sparked concerns about equity valuations in recent months, but Montrucchio argued the move largely reflects stronger growth expectations.
“We view the rise in yields as reflecting higher nominal growth which should be supportive of equities,” he said.
However, he warned that a sharper sell-off in longer-dated government bonds could alter the investment backdrop.
“A more disorderly sell-off at the longer end of yield curves would challenge this view, and the main risk to our forecasts is that longer-term bond yields rise more than expected.”
Schroders said such a scenario could be triggered by concerns about central bank credibility in tackling energy-driven inflation or renewed worries over sovereign debt sustainability.
As a result, the firm has moved to a neutral position on government bonds despite improved valuations following the recent rise in yields.
The asset manager continues to favour commodities as portfolio diversifiers, maintaining positive ratings on gold, energy and industrial metals.
Gold remains supported by central-bank buying and concerns around fiscal sustainability, while energy and mining stocks offer protection against geopolitical shocks and stronger-than-expected growth.
Elsewhere, Schroders upgraded the Japanese yen to positive, citing attractive valuations and the prospect of further monetary policy tightening from the Bank of Japan.