Investment Perspectives 2016

Executive Summary

Global GDP growth for 2015 once again failed to match up to early-year expectations. EM was a weak spot, with severe recessions observed in Brazil and Russia, while concerns over the slowdown in China affected the rest of Asia. U.S. GDP growth was well below the average January forecast of 3%, especially due to a weak first quarter. In contrast, the Eurozone fared well despite the Greek debt crisis, the slowdown of China and the ongoing tensions with Russia over Ukraine.

It turned out to be a very tumultuous year for financial markets. Commodities were under severe pressure for most of the year, mainly due to oversupply, high inventory levels and weaker demand. EM assets also performed poorly on the back of investor outflows and the prospect of higher US interest rates. European and Japanese equities fared the best, in local currency terms, mainly as the result of ultra-accommodative monetary policies. The dollar appreciated against all currencies, reflecting the relative strength of the US economy and the anticipation of higher interest rates, which were finally raised by the Federal Reserve during its last meeting of the year; this decision had been widely expected and was welcomed by the markets.

2016 global economic growth is expected to improve slightly, as the recovery in Europe gathers more momentum and as global emerging markets should do a little better, in particular due to less severe recessions in Brazil and Russia and a stabilization of China. The main central banks remain in accommodative mode, even if the Fed has started to hike rates. Some of the main risks for 2016 include an extension of the rout of commodities, especially oil, political issues such as Brexit, the rise of populism in Europe and US Presidential elections as well as geopolitical threats including instability in the Middle East and a deterioration of relations between NATO countries and Russia.

Throughout 2015, we gradually shifted the portfolios towards more flexible strategies, including non-benchmarked fixed-income funds, long/short equities and global macro. We increased our exposure to convertible bonds and also reinitiated an investment into US high-yield. We consistently remained very underweight EM assets and commodities, while being positively biased towards the dollar and DM equities.

For 2016, we remain positive on equities relative to high-grade bonds and maintain ouroverweight in developed markets equities over emerging markets. Our assessment is that European equities should benefit from the region’s economic recovery, reasonable valuations and the support of the European Central Bank’s policies. Our search for yield focuses on European loans and high-yield as well as investment-grade sovereign debt outside of Europe; we also believe that convertible bonds should perform well in the current market conditions and help to limit portfolio volatility.

Our view on the dollar remains positive, in particular against EM currencies, but also compared to the euro, whose value should continue to be impacted by the very accommodative policy of the ECB. Gold will have to face headwinds, including an appreciating dollar and higher US interest rates, but its role as a hedge could prove to be useful during periods of stress on other financial assets.

 

Table of Content 

  • EXECUTIVE SUMMARY
  • 2015: REVIEW OF OUR INVESTMENT THEMES
  • 2015: ECONOMIC DEVELOPMENTS
  • 2015: THE FINANCIAL MARKETS

 

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Investment Perspectives 2015 | Mid-Year Review & Outlook

Executive Summary

In this mid-year publication, we review our January expectations and analyse some current key economic indicators before outlining the asset allocation that we recommend for the second half of the year.

Our key message was that equities should do well...

In January, our main message was that risk assets, and equities in particular, should continue to be supported by a slowly improving economic background, by the accommodative policies of central banks and by better risk-adjusted valuations than those of debt instruments. We also expected the assets of the developed markets to outperform those of the emerging markets and for the U.S. dollar to appreciate against its peers.

 

Global economic growth has disappointed during Q1...but should improve during the 2nd half...

First quarter global economic growth turned out to be weaker than we had anticipated as the various economies produced mixed results. This weakness was largely due to an unexpected contraction of the U.S. economy which was affected by extreme weather on the East coast, port strikes on the West and consumers refraining from spending the money saved from lower oil prices. Lower rates of economic growth were also observed across most emerging markets with all the BRIC countries slowing down. However, on a brighter note, the Eurozone showed signs of a recovery on the back of a weaker euro, lower energy costs and ECB stimulus; the combined first quarter GDP of the 19 Eurozone countries was 0.4% higher than in the final three months of 2015. Japan also fared better-than-expected with first quarter growth being 1% higher than the previous quarter, mainly due to strong business spending. Overall, the signs for the second quarter show some improvement across the board and, looking ahead, we expect global economic activity to be stronger during the second half of 2015 and in 2016.

Equities remain our favourite asset class...with a bias towards Europe and Japan...

Our positive outlook on equities, and our bias in favour of developed markets, translated into solid portfolio returns until the end of May with Japanese and European stocks contributing the most. The month of June proved to be more challenging as equity markets gave up some of their earlier gains; increased uncertainty about Greece reduced some of the appetite for risky assets. Our caution towards highly-rated sovereign debt was vindicated (finally) by the sudden reversal of yields which had confounded expectations for so long. Our preference for leveraged loans, high-yield and convertible bonds turned out to be rewarding due to their low levels of duration and contraction of their spreads. Finally, our positive outlook towards the U.S. dollar generated a strong contribution to performance; more recently, we have locked in some of the dollar gains and adopted a more tactical approach towards currency exposures.

Risk management has led us to temporarily hedge some equity exposure...

The prevailing uncertainty surrounding the Greek crisis has led us recently to hedge part of our allocation to European equities as a way of managing risk in face of an unpredictable outcome. At this stage, we are still committed to an overweight of the equity asset class and an avoidance of highly-rated sovereign debt. Early in the year, we reinitiated a position into physical gold as a hedge against extreme risks and as a way to diversify the portfolios.

In the next section of the document, we will evaluate the macro environment and the prevailing financial conditions by highlighting several key indicators that we observe. Following a brief overview of the first half returns of the different asset classes, we will outline our current market outlook and asset allocation.

 

Table 0f contents

  • EXECUTIVE SUMMARY
  • THE MACRO ENVIRONMENT
  • FINANCIAL CONDITIONS
  • FINANCIAL MARKETS
  • MARKETS’ OUTLOOK
  • ASSET ALLOCATION 2nd HALF 2018

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Investment Perspectives 2015

Executive Summary

Global economic growth disappointed in 2014 with weakness observed across many regions. The euro zone, including Germany, was impacted by a slowdown of economic activity and by the backlash of sanctions imposed on Russia following its annexation of Crimea in March. In contrast, the US economy grew at a healthy rate. This divergence of growth trends between the US and the rest of the world was also reflected by the diverging monetary policies of the major central banks.

In 2014, the financial markets were characterized by an unexpected rally of sovereign bonds due to the absence of inflation and the accommodative stances of central banks. During the second half, the dollar finally matched expectations as it appreciated strongly against all currencies. As in 2013, US equities outperformed those of the other developed markets and emerging markets struggled. Commodity prices were under persistent selling pressure during the second part of the year, acerbated by a China effect, with oil prices plunging by more than 50%.

Global economic growth is expected to pick up modestly in 2015, but the level of risk is rising. Europe will have to contend with a potential exit of Greece, a number of elections on the calendar and high levels of expectations related to ECB monetary easing. The Federal Reserve will have to tread carefully to avoid upsetting finely balanced markets while oil-producing countries will have to cope with shrinking oil revenue as prices have declined to 5-and-a-half year lows.

A number of investment decisions impacted the profile of our portfolios throughout 2014 even ifthe allocations to the different asset classes remained much the same. Back in January, we sold our remaining exposures to emerging market debt in local currencies and to physical gold; in March we then reduced our allocation to emerging market equities. Other key moves were to replace a portion of our European high-yield position by Europeans loans and to increase developed markets equities in May; during the summer, we sold US high-yield bonds to invest into an unconstrained US fixed-income strategy and initiated a positive call on Japanese equities.

At the beginning of 2015, we have reduced our overweight into the equity asset class but maintained our preference for developed markets equities over those of the emerging markets. Over the course of the year, equities should benefit from better valuations compared to bonds and from the accommodative policies of central banks. Furthermore, the search for yield will continue to attract investors towards the high dividends distributed by blue chip companies. Our allocation to debt instruments will remain underweight as the risk/reward profile of highly-rated sovereign bonds is more asymmetric than ever. Our search for yield is focused on investment-grade sovereign debt outside of Europe and the US and on European credit, high-yield and loans.

Despite the overwhelming market consensus, we expect further appreciation of the US dollar. We continue to avoid the commodity asset class as fundamentals have deteriorated over the last year due to slowing Chinese demand, ample supply, a stronger dollar and low inflation. Finally, the outlook does not look too promising for gold as some of its market dynamics have weakened during the past years; a firm dollar and the risk of a rise of real interest rates represent headwinds that are difficult to ignore.

 

Table 0f contents

  • EXECUTIVE SUMMARY
  • 2014: REVIEW OF OUR INVESTMENT THEMES
  • 2014: ECONOMIC DEVELOPMENT
  • 2014: THE FINANCIAL MARKETS
  • 2015 : ECONOMIC OUTLOOK
  • 2015: FINANCIAL MARKETS’ OUTLOOK
  • 2015: ASSET ALLOCATION

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Investment Perspectives 2014 | Mid-Year Review & Outlook

Executive Summary

Our key message was that risky assets should do well...

In this mid-year review, we will take a brief look back at what was written in our January 2014 investment perspectives and analyse some key economic indicators before explaining the asset allocation that we recommend for the second half of the year. In January, our main message was that risk assets, and equities in particular, should be supported by a slowly improving economic background, the reduction of tail risks and more attractive valuations than those of the safest debt instruments. We also expected the major central banks to extend their supportive monetary policies and, in the case of the Federal Reserve, to cautiously manage the markets’ expectations for a hike of short-term interest rates.

 

Global economic growth has disappointed during Q1...but should improve...

Global economic growth turned out to be below forecasts during the first quarter. The weather-affected US economy recorded a totally unpredictable contraction of its GDP at a 2.9% annualized rate, while the Euro-zone economy also grew less than expected as it only expanded by 0.2% compared to expectations of 0.4%; growth was only positive thanks to the rude health of the German economy, which compensated for the stagnation observed in France and the shrinking activity in economies such as Italy and the Netherlands. Finally, growth has also disappointed in the developing economies, due to political turmoil, rebalancing in China and slow progress on structural reforms. Looking ahead, however, global economic activity should gather speed as the year progresses and continue to build momentum in the years ahead.

Equities have been gathering momentum...and remain our favourite asset class...

Our positive outlook on equities was challenged by the weak start to the year, but the asset class quickly recovered and is now behaving more in-line with our expectations. In contrast, the safest debt instruments have fared better than what we were expecting; however, our preference for high-yield and convertible bonds proved to be equally rewarding due to the positive impact of lower interest rates and tighter spreads. The contribution of hedge funds has been underwhelming and has not matched our expectations so far. Finally, our long-term bias towards the US dollar seems finally to be paying off as we believe that the EUR/USD parity of 1.40 represents a level unlikely to be revisited for some time.

Our overall asset allocation remains much the same...

The prevailing financial and economic conditions have not led to major changes of the portfolios’ structure; the allocations to the different asset classes have remained much the same since the beginning of the year, but there has been some turnover within the different asset classes. At this advanced stage of the recovery cycle, we are cognizant of the potential pitfalls ahead and are prepared to implement significant allocation changes in due course.

In the next section of the document, we will review some of the factors that have had the biggest impact on financial markets so far this year and also highlight several key economic indicators that we observe to evaluate economic conditions. Following a brief overview of the year-to-date trends of the different asset classes, we will outline our market outlook and the asset allocation we currently recommend.

Table 0f contents

  • ECONOMIC OUTLOOK REVISITED
  • FINANCIAL MARKETS
  • OUTLOOK
  • ASSET ALLOCATION 2nd HALF 2014

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Investment Perspectives 2014

Executive Summary

In Europe, the levels of stress have continued to abate and political events had a lower impact on financial markets than during the previous years. The spreads of peripheral sovereign debt continued to decline and European equities were much in demand over the course of the year. The main central banks confirmed their positions as being the most influential drivers of the markets; in May, the talk of tapering by the Federal Reserve had a significant effect on bond yields and emerging market assets. In October, the ECB decided to cut its refinancing rate following an unexpected drop of inflation.

 

In 2013, the financial markets were characterized by a large divergence of performances across asset classes. The best performing assets were the equities of the advanced economies, while emerging market equities lagged. It was a difficult year for fixed-income assets, with many market segments recording negative returns, in particular emerging market debt; in contrast, high-yield bonds performed well. The prices of most commodities ended the year lower, with gold losing more than a quarter of its value.

 

Global economic growth is expected to improve in 2014 led by advanced economies. The headwinds represented by fiscal drags in the US and in Europe will dissipate and a higher level of economic activity should be supported by a certain degree of re-synchronization of growth across the different regions, including the Euro zone. The main risks are represented by the upcoming changes to the Federal Reserve’s monetary policy, the fragility of the Euro zone recovery and the implementation of structural reforms in emerging economies.

 

Monetary policies will remain very accommodative in the developed economies even if they will start to diverge as the Federal Reserve begins to reduce the size of its asset purchase program. However, this change of policy does not represent a tightening of financial conditions but a normalization of interest rates in the context of more supportive economic conditions; the Fed will maintain short-term interest rates close to zero in 2014. In contrast to the Fed, the European Central Bank maintains a bias to an easier monetary policy to contain the threat of low inflation and support the nascent recovery.

 

At this stage, we will not be making major changes in terms of asset allocation, as we recommend maintaining the current overweight into equities and continue to trim our exposure to debt instruments with unrewarding characteristics.

 

The allocation to investment grade bonds should decrease further but, for Euro based portfolios, we will be holding our core position in a fund investing into Euro-denominated investment grade credit with an active hedging of duration risk. Conditions remain supportive for high-yield bonds as there is still room for some spread compression and as most technical factors are positive.

 

The reduction of tail risks and the rich valuations of the safest debt instruments make equities the most attractive asset class. From a regional perspective, our allocation will continue to focus on developed markets despite the lower valuations of emerging market equities. Within emerging markets, we favour Asian equities over Latin American ones and maintain our current exposures to Chinese and to Asian equities.

Table 0f contents

  • EXECUTIVE SUMMARY
  • 2013: REVIEW OF OUR INVESTMENT THEMES
  • 2013: ECONOMIC DEVELOPMENT
  • 2013: THE FINANCIAL MARKETS
  • 2014 : ECONOMIC OUTLOOK
  • 2014: FINANCIAL MARKETS’ OUTLOOK
  • 2014: ASSET ALLOCATION

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Investment Perspectives 2013 | Mid-Year Review & Outlook

Executive Summary

In this mid-year review, we will revisit our investment perspectives for 2013 before outlining the asset allocation we recommend for the second half of the year. In January, we expressed the view that the risks within the Euro zone had receded and expected an on-going improvement of conditions in the sovereign debt markets. We also emphasized the key role played by the major central banks and their impact on the behaviour of capital markets has, if anything, become even more overwhelming during the first half of 2013. As anticipated, the threat of inflation has been non-existent and short-term interest rates have remained stable or even been driven lower by central banks, concerned about a slowdown of growth and currency appreciation.

 

As forecasted, global economic growth has been lacklustre and the perspectives for the major economies are quite divergent. The U.S. economy has coped well with the automatic budget cuts and appears to be in a good position to experience an acceleration of the pace of growth. The Euro zone economy contracted during the first quarter but the prospects for a pick-up of activity are slightly more encouraging. Emerging countries have continued to prioritise a more balanced path of growth instead of growth at any cost; this has translated into below-par growth figures, in particular for China and Brazil.

 

We recommended a more dynamic positioning of the portfolios at the beginning of the year due to receding tail risks and, to a certain extent, to the lack of fixed-income assets with reasonable yields. This lead us to increase our allocation to equities and convertible bonds, reduce the exposure to investment-grade credit and maintain our positions into high-yield and emerging market debt. We also excluded any investments into highly-rated government bonds. Our assessment that the lower valuations of European and emerging market equities should help them to outperform US ones has proved to be off the mark. However, we had refrained from over- weighting positions in emerging market equities, which has turned out to be a positive decision.

 

When looking at the prevailing market conditions since the beginning of the year, the asset allocation of our portfolios appears to have been quite well-suited. We must however express agenuine dissatisfaction with the year-to-date performances of our portfolios. Generally speaking, the returns produced by the managers of our selected funds have been very satisfactory and the impact of currency variations has been limited. What really hurt portfolio performance was our exposure to gold mining equities, to commodities including physical gold and, to a lesser extent, our equity and debt positions in emerging countries. Our exposure to commodities has since been cut and profits been taken on certain equity positions, leaving our portfolios with above-average levels of cash. This positioning has contributed to limit the impact of the June correction and will enable us to redeploy this cash in an optimal way during the months ahead. Finally, we must also point out that the performance of the widely referred to MSCI World Equity Index is influenced by the heavy weightings of a limited number of equity markets and does not reflect the very diverging performances observed in equity markets across the world this year.

 

In the next section of the document, we will review the factors that have had the biggest impact on financial markets so far this year and also highlight some of the key economic indicators that we observe to evaluate economic conditions. Following a brief overview of the year-to-date trends of the different asset classes, we will outline our outlook and the asset allocation we recommend for the quarters ahead

Table 0f contents

  • CONOMIC OUTLOOK REVISITED
  • FINANCIAL MARKETS
  • OUTLOOK
  • ASSET ALLOCATION 2nd HALF 2013

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Investment Perspectives 2013

Executive Summary

In 2012, considerable progress was made in the Euro zone. The ECB’s commitment to buy troubled debt proved to be a turning point, with rates in Italy and Spain dropping to non-stressed levels. The risk of a breakup has decreased and Greece has been given more time. The improvement of the housing sector in the United States has contributed to higher levels of consumer confidence while the Chinese economy has avoided a hard landing. Finally, thepolitical landscape has become clearer following the change of leadership in China and elections in the U.S. and France. In particular, the dynamic of the Franco-German axis has been impacted by the election of the new French President, François Hollande.

 

The financial markets were characterized by strong demand for all types of debt instruments and low volumes in the equity markets. The best risk-adjusted performances were recorded by assets within the fixed-income space. During the first half, U.S. equities were resilient while European ones were under selling pressure. These trends reversed from June onwards, with European equities outperforming. Volatility in foreign-exchange markets was also high, even though year-on-year variations were small for the main parities.

 

Global economic growth will remain modest in 2013. Austerity programs will continue to impact economic activity in the Euro zone even if it should have to face lesser headwinds. The prospects for the United States appear more encouraging but, even if an agreement on the fiscal cliff has been reached, the pace of growth will be below trend. The global economy can no longer rely on elevated growth rates of emerging economies as the latter have not been immune to the issues faced by the more developed economies.

 

Monetary policies will remain very accommodative in the developed economies. The Federal Reserve has asserted its intention to maintain interest rates close to zero for an extended period and to support the housing market by buying mortgage-backed securities. The European Central Bank will continue to provide liquidity to the banking sector and is committed to purchase peripheral sovereign debt under certain conditions. The central banks of emerging economies are also likely to maintain their accommodative stance by extending their looser monetary policies.

 

We recommend a more dynamic positioning of the portfolios at the beginning of 2013. The significantly tighter credit spreads of Investment Grade corporate bonds has reduced their attractiveness while the receding tail risks are more supportive for risky assets.

 

For the beginning of 2013, we recommend reducing the exposure to investment-grade credit and continue to exclude any investments into G-7 government bonds. We also recommend increasing the exposure to convertible bonds, while the current allocations into high-yield and emerging market debt are maintained.

 

Our exposure to equities will favour high-quality dividend stocks. We also like the shares ofinternational companies with strong brands, especially those with growing emerging markets exposure. From a regional perspective, our assessment is that European and emerging market equities should outperform those of the United States.

Table 0f contents

  • EXECUTIVE SUMMARY
  • 2012: REVIEW OF OUR INVESTMENT THEMES
  • 2012: ECONOMIC & POLITICAL DEVELOPMENT
  • 2012: THE FINANCIAL MARKETS
  • 2013 : ECONOMIC OUTLOOK
  • 2013: FINANCIAL MARKETS’ OUTLOOK
  • 2013: ASSET ALLOCATION

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Investment Perspectives 2012 | Mid-Year Review & Outlook

Executive Summary

In this mid-year review, we will revisit our investment perspectives for 2012 before outlining the asset allocation we recommend for the second half of the year. In January, we expressed the view that the debt issues faced by the public sector would still represent the biggest dangers for the markets and this has clearly proven to be the case. Market participants have once again had to experience extreme levels of stress within the European sovereign debt markets. A Greek exit from the Euro zone was narrowly averted following close elections, while Spain has found itself under intense market pressure since the end of February, leading to a 100 billion euro bailout for its ailing banking sector. The European summit on 28-29 June produced measures that triggered amassive relief-rally of risky assets on the last trading day of the month. The announcement of the possibility for the European Stability Mechanism (ESM) to directly recapitalise European bankswithout adding to the level of sovereign debt was particularly well received by the markets.

 

As widely anticipated, a slowdown of economic growth has been observed in most regions. Economies are contracting across the Eurozone and the 17-nation region is close to recessionary levels; the U.S. economy has been expanding at a below-par pace and the growth rates of emerging countries have been falling, at times considerably. As expected, the Chinese economy has expanded at a slower pace, but has avoided a hard landing. In most countries, inflation pressures have abated, which has allowed the central banks of emerging countries to adopt looser monetary policies to provide some stimulus for their economies.

 

We were not expecting companies and households in Europe to benefit from an expansion of credit, despite the two massive longer-term refinancing operations (LTRO) run by the European Central Bank. These operations have contributed to ease funding pressures and decrease fears of a liquidity crunch, but have not improved credit conditions. This has been due to the on-goingdeleveraging of the banking sector and its focus on capital requirements to the detriment of the accordance of new loans.

 

We recommended a cautious positioning of the portfolios at the beginning of the year due to the high level of uncertainty. The initial appreciation of risky assets came as a surprise, but the ensuing correction confirmed that it was premature to be carrying high levels of risk in the portfolios. Assets providing income such as investment-grade credit, high-yield bonds and high quality dividend paying stocks have generated positive performances and contributed to limit volatility. So far, our forecast for an appreciation of the U.S. dollar against the Euro has proven to be correct. The Federal Reserve has so far refrained from undertaking a new round of quantitative easing and the deterioration of the debt crisis in Europe has weighed on the common currency.

 

In the next section of the document, we will review the factors that have had the biggest impact on financial markets so far this year and also highlight some of the key economic indicators that we observe to evaluate economic conditions. Following a brief overview of the year-to-date trends of the different asset classes, we will outline our outlook and the asset allocation we recommend for the quarters ahead.

Table 0f contents

  • ECONOMIC OUTLOOK REVISITED
  • FINANCIAL MARKETS
  • OUTLOOK
  • ASSET ALLOCATION 2nd HALF 2012

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Investment Perspectives 2012

Executive Summary

In 2011, the crisis of sovereign debt in the Euro zone deteriorated. Portugal became the third country to apply for financial support from the European Union and the International Monetary Fund. Government bonds issued by Italy and, to a lesser extent, Spain were sold off, leading to an increase of borrowing costs and a widening of credit spreads compared to those of German Bunds.

 

The financial markets were characterized by elevated volatility, less liquidity and intraday swings well above average. The best yearly performances were recorded by the assets considered to be the safest, including US Treasuries, German Bunds and gold. Most equity markets ended the year with double-digit losses, but U.S. equities were resilient and ended the year virtually unchanged. Volatility in foreign-exchange markets was also high, even though year-on-year variations were small for the main currencies.

 

The global economy should slow down in 2012. Economic activity in the Euro zone will most likely contract and the United States should grow at a moderate pace. Faster-growing economies will also face lower growth than in the past year, but we do not anticipate a hard landing of the Chinese economy. The European banking sector is under severe stress and the ongoing deleveraging of the banks’ balance sheets will negatively impact other economic regions.

 

Monetary policies will remain very accommodative in the mature economies and thecentral banks of emerging countries are likely to loosen policies due to receding inflation pressures. The Federal Reserve has clearly indicated its intention to maintain interest rates close to zero for an extended period while the European Central Bank is expected to takeadditional easing decisions.

 

We recommend a more cautious positioning of the portfolios at the beginning of 2012. The failure of the European political leaders to come up with a long-lasting solution has onlyincreased the level of risk for investors. Our inability to predict how the current crisis will unravel has led us to reduce our exposure to equities and adopt a more tactical approach.

 

Our attention will be more focused on assets providing income than on those which depend on price appreciation to generate positive returns. We continue to find little value in G-7 government bonds, but recommend increasing the exposure to investment-grade credit and high-yield bonds, especially those issued by U.S. corporations.

 

Our exposure to equities will favour high quality dividend paying stocks. We also like the shares of international companies with strong brands, especially those with increasing exposure to emerging markets. From a regional perspective, our focus will mainly be on U.S. stocks and we believe that emerging markets’ equities could fare better in 2012.

Table 0f contents

  • EXECUTIVE SUMMARY
  • 2011: REVIEW OF OUR INVESTMENT THEMES
  • 2011: ECONOMIC & POLITICAL DEVELOPMENT
  • 2011: THE FINANCIAL MARKETS
  • 2012 : ECONOMIC OUTLOOK
  • 2012: FINANCIAL MARKETS’ OUTLOOK
  • 2012: ASSET ALLOCATION

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Investment Perspectives 2011 | Mid-Year Review & Outlook

Executive Summary

 

We have reached the time when we revisit our investment perspectives for 2011 and outline the portfolio positioning we will be recommending for the remainder of the year. In January, we expressed the view that the problems faced by the public sector would represent the biggest dangers for the markets and this has clearly proven to be the case. As during last year’s spring,market participants have once again had to face extreme levels of stress within the European sovereign debt markets as Portugal finally requested a bail-out and the risk of a Greek debt default exploded. The issues related to the size of U.S. government debt also took on more importance, reflected by Standard & Poor’s decision to cut the outlook on U.S. debt from stable to negative.

 

Our beginning-of-the-year observation that it was still too early to be optimistic about a significant improvement of the trends in the real estate and job markets has been confirmed by data that hasoverall been disappointing. As widely expected, inflation concerns have translated into the tightening of monetary policies by many central banks of emerging countries, leading to relative underperformance of their equity markets. Finally, markets have also had to face unforeseen and unpredictable events, most notably social upheaval in the Middle East, leading to higher oil prices, and a massive natural disaster in Japan, which has triggered supply chain disruptions.

 

The listing of all these negative forces makes it easy to forget that there have also been some more supportive ones. The reporting of earnings for the first quarter already seems to be a distant memory due to the fact that markets have been so intensely focussed on macro-economic issues. Nevertheless, it is important to remember that these results once again demonstrated the ability of companies to keep on growing their profits and top-line growth despite the below-par growth environment in the U.S. and in Europe. In our opinion, this positive trend should subsist even if earnings momentum is expected to somewhat slow down. On a less favourable note, one has had to observe the difficulty of equity fund managers to outperform their benchmarks due to the extremely challenging conditions within equity markets.

 

As often the case, it has been extremely difficult to predict the trends of currencies and our anticipation of a recovery of the dollar against the Euro has proved to be well short of the mark. Despite the crisis in Euro-zone sovereign debt markets and its overvaluation against the dollar, theEuropean common currency has performed unexpectedly well. Taking into account the difficulty to extract positive contributions from the different asset classes so far this year, currency movements have continued to have a big impact on the performance of portfolios that are not hedged, especially those based in Swiss francs, the strongest currency year-to-date.

 

In the next section of the document, we will review the factors that have had the biggest impact on financial markets so far this year and also highlight some of the key economic indicators that we observe to evaluate economic conditions. Following a brief overview of the year-to-date trends of the different asset classes, we will outline our outlook and the asset allocation we recommend for the quarters ahead.

Table 0f contents

  • ECONOMIC OUTLOOK REVISITED
  • FINANCIAL MARKETS
  • OUTLOOK
  • ASSET ALLOCATION 2nd HALF 2011

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