“What I fear is complacency. When things always become better, people tend to want more for less.”
Lee Kuan Yew
Macro Environment
- Inflation pressure in developed markets remain subdued, despite rising oil prices and lower unemployment
- European recovery maintains momentum – Election results in Germany make substantial progress less likely
- US sentiment & confidence remain robust while hard data is catching up slowly
- Emerging markets growth remains robust
Outlook and Markets
- Risks for equity markets increase as valuations becomes stretched, mainly in the US
- Increased volatility across asset classes and regions ahead
- Fed still on track to tighten further – balance sheet adjustments are set to start soon
- 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 of the model portfolio
- 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-oriented one to a more domestically
supported one - Lower than expected growth in the US, coupled with
disappointments with respect to tax reform & reductions and
substantially increased spending lead to more than expected rate hikes
in the US and a possible recession within the next 18 months - The
global economy is “driving without a spare tire” ahead of the next
recession, whenever it happens, as most central 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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