It would be a mistake to be underweight stocks at this point. The world economy has mostly normalised. As argued in one of our previous email updates, we use Canada's economy as a model for the world economy because Canada is the only country that simultaneously benefits and suffers from lower commodity prices.
Correlation between oil and stocks has peaked and should fall back towards zero over the coming weeks and months. However, correlation between bond yields and stock prices remains positive, which means stocks should continue to rally, as the Fed gradually raises rates towards "normal" (which the Fed sees at around 1.75% to 2.0%).
Emerging market stocks have outperformed global stocks over the last few months, but as shows in our Chart 2 this outperformance hasn't broken out of its trading range. It is too soon to overweight EM stocks (EM bonds will continue to deliver stable and reliable returns). However, many bank stocks in various EM countries — from Russia and China to Colombia and Brazil — are trading at attractive levels. We will soon be issuing another Special Report on the banking industry in which we will take a much closer look at various banks.
The ECB (and Mario Draghi in particular) are absolutely determined to raise inflation expectations towards 2%. Unless this happens, Euro Zone monetary policy will remain extremely stimulative (see Chart 4), which is a very potent environment for various stocks and especially real estate. Our suggested Global Asset Allocation Table is presented on the last page of our publication.