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Market views

This section of the site contains an overview of our global investment strategy and a review of recent developments within the major world markets.

The information contained in these pages has been derived from internal sources that we consider to be reasonable and appropriate. It also includes our views and expectations, which cannot be taken as fact.

Investment markets and conditions can change rapidly and as such the views expressed should not be taken as statements of fact nor should any reliance be placed on these views when making investment decisions. Past performance is not a guide to future performance.

 Global Investment Strategy - End of August 2010

Current Investment Policy -- - Neutral + ++
Asset Allocation Cash  Bonds Property,
Equities		  
Equities   Asia, Emerging Markets, <<US,
<<Japan
 Europe (ex UK)>>, UK  
Bonds   Overseas Bonds, UK Gilts, UK Investment Grade Bonds  

 Policy changes over the month, when applicable, are shown by arrows (<<, >>)

Economic growth
There have been no major changes to our inflation forecasts. The developed world’s headline rate of inflation is expected to average 1.3% this year and 1.1% in 2011. Forecasts for core prices (excluding food and energy) are basically unchanged, with projected increases of 0.7% this year and 1% in 2011. Risks to our forecasts are wider than usual and skewed to the downside in the short term, but biased to the upside in the medium term.

Interest rates
We have not made any adjustments to our interest rate forecasts. The Bank of England is expected to raise interest rates to 2% by the end of 2011, while the European Central Bank is expected to tighten policy to 2%. In the US, the Federal Reserve is still expected to start raising interest rates towards the end of 2010, with hikes to 2.5% by December 2011. Given the persistence of deflation in Japan, the Bank of Japan is forecast to keep interest rates at 0.1% until at least the fourth quarter of 2011.

Bonds
Our forecasts for ten-year government bond yields are unchanged. For US Treasuries currently yielding 2.6%, we expect a rise in yields to 4.1% by June 2011. In the UK, we forecast 4% for gilts; we think German bund yields will rise to 3.25%; and in Japan we see the market at 1.2%. In other words, we expect a simple weighted average of these government bond yields to rise by about 91 basis points over the coming year.

Equities
Our central economic case translates into a FTSE 100 level of 6,000 by the end of 2010 and the same level for the end of 2011. The tug-of-war continues between short-term positives and longer-term concerns over the strength and sustainability of global growth. The focus most recently has been the rally in government bond markets and the flattening of yield curves. Investors’ faith in equities has taken another knock, and we believe there is a moderate probability of above-average equity returns in the short run.

 

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