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.

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