Paolini emphasized that the last decade has been bad for bonds, especially German ones, but that has changed. “Now is a good time to invest in bonds,” he told journalists.

He said that US exceptionalism is coming to an end and the great convergence has started. He believes that global growth will be below trend over the next five years and inflation will be above average. “Growth rates will become more similar amongst countries and the dollar will be weaker. This will be bad for equities,” he said.

Paolini expects global growth to reach 2.7 per cent over the next five years, with the US at 1.5 per cent, the EU at 1.4 per cent, the UK at 1.3 per cent, Switzerland at 1.2 per cent and emerging economies at 4.1 per cent, led by India at 6.7 per cent. He also expects global inflation to reach 3 per cent, with the US at 3 per cent, the EU at 2.2 per cent, Japan at 1.9 per cent and emerging economies at 3.4 per cent, led by India.  

Government bond yields are now broadly in line with their fair value in developed markets, Paolini said. The UK market is more attractive and emerging markets are very good, especially Brazil and Mexico.

Returns will be weaker for equities, half the value over the next five years than previously. He believes that mid-cap stocks will be the most attractive, it is good to diversify away from US equities, and add to Europe and emerging markets. He also favors secular growth themes such as IT, pharmaceuticals and industrials. Paolini thinks that China is investible, using a selective approach.

Overall, Paolini said investors should hold fewer equities, especially US equities, increase their bond exposure, particularly credit and emerging market debt, and keep hold of alternative assets, notably gold. However, he underlined that he is not advising investors to sell out of US equities as they will always be attractive, just reduce their holdings.