Global equity markets showed continuing strength in the first part of the year, and should continue to advance at a slightly reduced pace despite a number of persistent macroeconomic risks, suggests a report released Wednesday by BMO Harris Private Banking.

“The global investment landscape became notably more optimistic in the first quarter,” says Paul Taylor, chief investment officer, fundamental equities at BMO Asset Management. “As fears about the eurozone credit crisis eased somewhat and U.S. economic data improved, investors demonstrated a renewed sense of confidence by returning to riskier assets. Equity markets around the world advanced as a result.”

Taylor also notes that, in the coming 12 months, bond returns are expected to be positive, but lower than equity returns. “To align our clients’ portfolios with this view, we will be modestly increasing their equity allocations relative to fixed income.”

In the report, BMO Harris Private Banking says the U.S. economy is on the upswing.

“We don’t see any strong reasons to think that the U.S. economy will deteriorate in the near term,” says Jack Ablin, executive vice president and chief investment officer, Harris Private Bank. “Combined with the U.S. Federal Reserve’s commitment to an accommodative monetary policy until at least 2014, this picture leads us to expect GDP growth of around 2% over the next 12 months.”

One shadow on the horizon for the U.S. economy is the potential for tax-related measures to dampen U.S. growth following the presidential election. “We expect this concern to grow as November nears,” says Ablin. “The Bush-era tax cuts for high-income earners are set to expire in December 2012, and automatic spending cuts in the Budget Control Act are scheduled to begin in 2013. The timing and impact of the spending cuts will depend greatly on the outcome of the elections, but a worst-case scenario would produce a fiscal drag of more than 3% of GDP beginning in 2013.”

As for corporate earnings, the report states that single digit growth is expected. “After two years of strong growth, we believe the current business cycle is maturing to a stage where corporate earnings growth typically slows,” says Taylor. “We think that top-line revenues still have the potential to grow and that price-to-earnings ratios can expand. We expect mid-single digit earnings growth over the next year in the United States and Canada.”

On the fixed income front, the report suggests interest rates will remain low for some time. “We expect to see modest positive returns from Canadian fixed income investments in the next year,” says Taylor. “A slight increase in interest rates is possible, but rates will likely remain low for some time. We continue to believe that mid-term bonds have the most favourable outlook compared to short- or long-term bonds.”