Significant inflation in the UK and US hit bond prices and brought the prospect of rate rises and tapering of quantitative easing closer. Long term interest rates are back close to April levels. Shorter term rates are pricing in rate rises much sooner than before. Where the virus has had less impact, rates have moved less.

A rise in interest rates raises the general level of asset returns, especially for fixed income. Amongst equities, emerging markets have seen significant repricing and enhanced prospects while developed equities have had a relatively flat quarter so their outlook has improved only little.

Returns expectations for money market and similar instruments have risen with interest rates, the lopsided change along the yield curve meaning short term returns from cash-like instruments are up more than they are over longer terms.

Cheaper gilts mean higher expected returns but they are cheaper in part because of fears that they might get even cheaper very soon. That possibility offsets the higher yield in the short term.

Inflation is good for inflation-linked bonds and its continued rise over the past quarter means the outlook for index-linked gilts is further buoyed. The relative movement between nominal and real interest rates over the quarter means inflation rate expectations have edged even higher but, with long-term real rates remaining firmly below -2%, prospects for this asset class continue to remain low.

Investment grade credit had a lacklustre quarter, broadly in line with treasuries, but higher spreads and a relatively solid footing for corporations is a benign scenario for corporate bonds and gives them a yard or two on gilts this quarter.

There was a smaller upward movement across sovereign bond rates in overseas developed economies compared to the UK so expected returns for this asset class are also up albeit less than for UK bonds.

High yield bonds enjoyed a good quarter with small but positive returns, and while the movement in interest rates provides a boost to their outlook, the change in expected returns is less than for investment grade credit.

Despite some strengthening of the pound and an oil supply crisis towards the end, UK markets ended the quarter higher than they began it. However, impending rate rises to combat inflation hinted at by the Bank of England and the continuing uncertainty surrounding COVID-19 and Brexit means that growth prospects are partially hollow and this has dampened the uplift in expected returns.

US equities had a lacklustre quarter over which GDP received downward revisions and debt ceiling politics threatened to disrupt markets. Fundamentals have not changed much and, with the Fed striking a hawkish tone amidst inflation fears, most of the change in outlook comes from the risk-free baseline and expected returns have improved on the quarter but still not as far as two quarters ago and less than other developed markets.

Unlike the Bank of England and Federal Reserve, the ECB has resisted any indication of tapering its quantitative easing and there’s increased pressure on equities to deliver. However, change of leadership in arguably the most influential European market and hikes in energy prices have weighed on growth prospects so, after a relatively flat quarter, expected returns for eurozone equities have only nudged upwards a little.

Despite the global semiconductor shortage impacting corporate Japan, a change in leadership and improving control over the COVID-19 pandemic had a positive impact on Japanese stocks over the past quarter, with the Topix being at its highest in the last three decades. A weakened yen and strong fundamentals means some of that momentum is retained going forward and Japanese equities have an uptick in outlook.

Like emerging markets, Asia-Pacific equities also suffered this quarter with the flagship index dropping by close to a tenth. Fears of spillover from the property crisis in China and wider supply chain issues weigh on growth prospects which, though up on the quarter, are less than other equity markets.

Over the past quarter, emerging markets saw its biggest fall since the COVID-led crisis last year, mostly on the back of a sell-off in China abetted by various government interventions but also endemic supply chain issues and regional political uncertainty. With emerging market currencies also broadly falling against the dollar over the period, EM stocks appear cheap and prospects for this asset class have strengthened most amongst equities.

Property continued its slow recovery over the past quarter as confidence of the existence of a post Covid future grows but what use of current commercial spaces the future holds remains unsettled, there is a lot of rent still unpaid and rising rates may not be good news so expected returns remain low despite the general boost they’ve shared.