Goodbye benign economics

Markets have been enjoying the most favourable phase of the economic cycle, in which growth is strong but liquidity conditions are still expansionary. The correct strategy has been to be overweight in higher-risk, economically-sensitive assets, preferring equities to bonds, cyclical stocks to defensive stocks, emerging markets to developed markets and lower-rated bonds to government securities. The key issue this year will be when and how this benign phase ends. There are two main possibilities. A growth surge might produce inflation, necessitating higher interest rates - the tighter liqui...