Investment strategy October 2015

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The Global Investment Committee confirmed its conviction in the existing asset allocation at its meeting on 15 October. The allocation consists of an overweight in equities, a strong underweight in bonds and overweights in commodities and hedge funds. The GIC also decided to lift the short euro versus long US-dollar hedge for US-dollar portfolios, given a muted outlook for the US dollar. The committee’s discussion centred on the main macroeconomic scenario, calling for a continued global recovery, while also considering the potential for an adverse alternative scenario, involving a recession.

Moderate recovery expected

The main macroeconomic scenario calls for a moderate recovery and a cyclical pickup from now into 2016. In the past weeks, economic growth forecasts have been revised downward by Group Economics, first for emerging markets and thereafter for developed economies. Group Economics forecasts are now in line with the IMF and general consensus. The downward revisions were owing to the potential “knockon effect” from the slowdown in China. While China remains on track according to official data, there is a clear loss of momentum.

The US and Europe have shown resilience to the slowdown in emerging markets, but it is beginning to have an impact. Solid domestic demand, however, continues to support growth. The Fed’s delay in hiking rates, with the first hike now expected in July, is positive for global growth and risky assets. So far, the impact of the delay has included stabilising capital outflows and a rebound in emerging markets currencies and commodities markets. While the slowdown in China remains a threat, there is confidence that policymakers will use their arsenal of financial tools to ensure that the slowdown is gradual.

When considering risks that could impact the investment allocation, it is considered very unlikely that there would be a recession in the next 12 months. While the possibility of a recession is considered remote, potential triggers, including a collapse in China, a deflationary shock, collapse of the commodity markets and policy errors, were discussed and evaluated by the GIC.

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