Investment Outlook (Q4/2017)

The Investment Outlook for the fourth quarter of 2017 has been published.
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“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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