Investment Perspectives 2016 | 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.

We had maintained a preference towards equities over high-grade bonds

Despite our long-term view that equities continue to offer better relative value to high-grade bonds, we took assertive measures in early January by significantly reducing our equity exposure, and raising cash to a high level, which contributed to limit part of the impact of severe market stress on the portfolios.

We had also indicated our increasing interest for emerging market equities, which became effective in March when we decided to increase our allocation to the asset class. Another key conviction was the need for additional portfolio diversification by investing into alternative strategies with low volatility and limited correlation to traditional assets.

Global economic growth has disappointed during Q1… and is not expected to pick up during the 2nd half

Once again, global economic growth has turned out to be inferior to forecasts, with the US economy only growing modestly during the first quarter and no other major economy being able to compensate for this disappointment. Growth forecasts for the whole of 2016 have recently been cut by the World Bank, the IMF and the OECD. These revisions were published before the unexpected decision of the British voters to leave the European Union, meaning that, if anything, uncertainties have only increased. One of the main reasons for this weakening outlook is the feeling that central banks are left with very few tools that can make a difference to the real economy and that governments are reluctant to introduce any kind of fiscal stimulus.

We are more defensively positioned and will look to increase risk only when attractive opportunities arise

In the light of deteriorating fundamentals, uninspiring prospects for companies to grow their profits and higher political risks, we have adopted a more defensive stance for the portfolios by reducing further our equity exposure and by maintaining the cash allocation above 10%. Our exposure to the US dollar was tactically increased during the first half and we took advantage of its appreciation after the UK referendum to take profits on half the position so, there again, we are now exposed to a lower level of risk. We have also consistently been adding to the alternative space in order to reduce portfolio volatility and to be less dependent on the direction of the markets.

Risk management has led us to hedge the exposure to European equities

The UK public opinion during the weeks preceding the referendum on whether to remain in or leave the European Union gave us very little conviction on the outcome of
the vote. We also evaluated that the downside of equity markets in the case of a “Leave” vote would be much bigger than the potential upside if the “Remain” vote were to win. We decided to hedge our exposures to UK and European equities in the light of such an asymmetrical profile tied to a binary event. Following the result, the hedge on UK equities was quickly lifted. We will maintain the temporary protection unless the prospects for European equities significantly improve.

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.


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