Investment Outlook (Q1/2018)

The Investment Outlook for the first quarter of 2018 has been published.
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“Price is what you pay. Value is what you get.”

Warren Buffett

Macro Environment

  • Inflation pressure in developed markets is picking up slightly
  • European recovery maintains momentum – Italian elections could add to political turmoil again
  • US sentiment & confidence remain robust while hard data is catching up
  • Emerging markets show no signs of growth weakening

Outlook and Markets

  • Risks for equity markets increases further as valuations become even more stretched, especially in the US
  • Investor complacency is manifesting itself in historically low volatility
  • Fed still on track to tighten further and might be forced to step in more resolute
  • ECB and BoE continue to change wording to prepare markets for an exit of their loose monetary stance
  • Productivity growth continues to be located in emerging markets rather than in developed economies

Main Investment Calls

  • Remain cautious and keep a neutral position of the return and income portion in the model portfolio
  • Increase cash allocation to neutral
  • Equities over Sovereign Bonds
  • Emerging over Developed Equities
  • EMD and Investment Grade Credit over Sovereign Bonds
  • TIPS as an (unexpected) inflation hedge

Main Risks

  • Global trade war initiated by erratic and extreme protectionist measures by the Trump administration
  • Risks of missteps as China continues the attempt to rebalance its economy
    from an unsustainable export-orientedone to a more domestically
    supported one and impose too strict regulatory frameworks on banks
  • Higher than expected inflation in the US, coupled with substantially increased
    spending lead to more than theexpected rate hikes by the Fed and choke
    of economic momentum, leading to a possible recession
  • The global economy is “driving without a spare tire” ahead of the next recession,
    whenever it happens, as mostcentral banks are not far removed from the
    zero lower bound
  • The potential for the long-held geopolitical equilibria in the Korean Peninsula and Middle East to be shaken up

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