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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