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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 June 2010

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

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

Economic growth
Our growth forecasts have been revised modestly higher. This reflects stronger than expected activity in the first half of 2010, but recent stress in financial markets suggests the risk to our central view is slightly weighted to the downside. For the main developed nations (the average of the US, UK, continental Europe and Japan), we now forecast growth of 2.2% in 2010, revised up from 2%. Our forecast of 2.6% for 2011 is unchanged. For the world including developing nations, we expect growth of 4.1% in 2010 (up from 3.7%), and a pick-up the following year to 4.3% (up from 4.2%).

Inflation
There have been some small changes to our inflation forecasts. The developed world’s headline rate of inflation is expected to average 1.1% this year (revised down from 1.3%) and 1% (1.2%) in 2011. Forecasts for core prices (excluding food and energy) are basically unchanged, with projected increases of 0.6% this year and 0.9% 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 changes to our end-2011 interest rate forecasts, but have pushed back from the fourth quarter of 2010 to the first quarter of the 2011 the point when UK and eurozone interest rates are likely to rise. By the end of 2011, the Bank of England is expected to raise interest rates to 3.25%, the European Central Bank to 3%. In the US, the Federal Reserve is still expected to start raising interest rates in the third quarter of 2010, with hikes to 3.25% 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 3.28%, we expect a rise in yields to 4.1% by June 2011. In the UK, we forecast 4.4% for gilt yields 12 months from now. We think German bund yields will rise to 3.6%; our forecast for Japan remains at 1.5%. In other words, we expect a simple weighted average of these government bond yields to rise by about 75 basis points over the coming year.

Equities
We are still reviewing our market point forecasts. In the meantime we make no changes. The tug-of-war continues between short-term positives and longerterm concerns over the impact of fiscal consolidation in the developed world. So far, the measures introduced within the eurozone and by the IMF to provide liquidity to peripheral governments and the banking system, combined with the ECB turning bond buyer of last resort, have had limited impact. Stock markets have stopped falling, but have remained in a choppy, narrow trading range. This is not a surprise given the nature of the problems investors find themselves grappling with. Sentiment will take time to recover and improvement will require clear evidence that growth and profits can be sustained in the face of recent equity price weakness and tighter fiscal policy in Europe.

 

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