Mark Burgess

Global equities and global bonds made progress in May 2014, with the former outpacing the latter in local currency terms; for the month, the MSCI World index rose 2.34% in total return terms while the JP Morgan Global Government Bond index returned 0.87%.

Commodities, which prior to May had performed very robustly, lost some ground as the Dow Jones-UBS Commodity index produced a dollar total return of -2.87%. Nonetheless, returns from the asset class remain well into positive territory for 2014 to date.

Looking forward, we believe that there are three questions that investors have to consider over the remainder of 2014:

•    How will bonds react to the normalisation of policy in the US?
•    What will happen in emerging markets as policy is normalised?
•    Will corporate profits drive equity markets higher?

Bond markets in recent months have presented us with a conundrum – indeed we held an ad-hoc Perspectives meeting in mid-May to discuss the meaningful decline in core government yields. In the US, our expectation is that GDP growth will be in the order of 2.5% this year and that the overall macroeconomic picture is probably stronger than the Q1 GDP data would suggest. All else equal, that should push bond yields higher, particularly if the Fed stops its QE programme later this year.

The outlook for eurozone bond markets is rather more difficult to call; certainly Germany and Spain appear to have positive growth momentum, which should put some upward pressure on yields if that momentum remains in train. By contrast, the growth outlook in countries such as Italy and France remains very subdued, which is likely to keep yields low. The lack of growth in France and Italy is worrying given that debt levels remain elevated at a time when inflation in the eurozone overall is very low (just 0.5% for the year ending May 2014). The ECB has responded by cutting official interest rates to record lows and now charges banks for depositing funds. It has also outlined a new programme of Long Term Refinancing Operations (LTROs) to aid bank lending and has said that it will intensify preparatory work related to outright purchases of asset-backed securities. Whether this policy response will work remains to be seen, but it shows that the ECB is definitely not resigned to a protracted period of low inflation.

In emerging markets, we remain positive on local currency emerging market debt (EMD) in our asset allocation matrix; my colleagues James Waters and Toby Nangle have commented recently on the value offered by EMD, especially for investors seeking absolute levels of yield. However, we maintain a bias against emerging market equities as we are still concerned about the macroeconomic outlook for China (which is a large constituent of the EM equity indices but only a relatively small component of EMD indices). As I have mentioned in previous comments, it is very hard to find examples of credit expansion on the scale seen in China which have not caused policymakers some significant headaches once the bonanza has ended.

Our outlook for equity markets for the remainder of the year is positive; M&A has made a welcome return in recent months, and while this increases the risk of value destruction by company managements in the longer term (e.g. if they overpay or acquire businesses that later prove to be a poor fit), it does provide an important short-term support for stocks, particularly at a time when the Fed is tapering QE. The style rotation over the last few months has been significant, but overall equity markets have been strong and current index levels suggest that investors still have confidence in the outlook for profits. For that reason, we trimmed exposure not only to government debt but also to investment grade credit in late May, as the rally in core yields had left both asset classes looking expensive. We deployed the proceeds into Japanese equities, as the fundamentals here continue to improve while the market has lagged other developed regions over 2014 to date.

by Mark Burgess, Chief Investment Officer at Threadneedle Investments

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Threadneedle’s global outlook.

As summer fades and an autumnal chill enters the air in the northern hemisphere, the developing world appears to be emerging from the long economic winter that followed the global financial crisis of 2008. In this viewpoint, William Davies surveys the global economy and highlights those stocks and sectors we favour.

While the US economic recovery has been a feature of financial markets this year, it is only recently that signs of improvement have become established in other developing economies. According to figures released in August, the eurozone emerged from recession in the second quarter of 2013 after a record 18 months of economic contraction. The good news has continued – August orders for goods made in the eurozone, for example, came in at their fastest rate since May 2011.

Europe, over the worst?

Our base case for Europe remains a slow and protracted economic recovery. However, we believe the worst is now over and are taking advantage of relatively attractive valuations. We continue to avoid stocks in the periphery, and heavily indebted businesses, which are at risk should negative growth shocks emerge.

We have recently taken positions in the Swiss bank UBS and Continental, a leading German autoparts supplier. UBS has been making progress downsizing its investment banking operations, where it has lacked the scale to compete effectively. The bank is strengthening its capital position and focusing on wealth management, an area where it is a global leader – boasting a relationship with half the world’s billionaires.

Continental is benefiting from a strengthening global automotive industry, and rising auto sales. Even in austerity-hit Europe there are grounds for optimism. Car sales in Germany, France and Spain rose in July. Sales of premium cars, many of which are equipped with Continental’s safety features, have rebounded in the US, and a growing Chinese appetite for luxury brands provides further support.

Weaker yen boosting Japanese profits

We are optimistic about the efforts of Japan’s Prime Minister, Shinzo Abe, to revive the economy. His policies, known as ‘Abenomics’, include boosting the supply of money in the economy and increasing government spending. Abenomics has already had a dramatic impact, sending the stockmarket soaring, whilst Japanese firms have reported a surge in profits largely thanks to the weakening yen. In early August, for example, Toyota raised its annual profits forecast and is expected to nearly double its profitability in the 12 months to March 2014, versus a year earlier. Critically, Japanese consumer prices have started to rise, a sign that the policies aimed at ending deflation are yielding results. Consumer price inflation rose to an annual rate of 0.7% cent in July, its highest level in almost five years.

We have been overweight Japan since early this year. Initially focused on exporters who are the immediate beneficiaries of a weaker yen, we have since broadened our exposure, taking positions in a number of domestic Japanese-exposed names, including the likes of Aeon, one of the largest diversified retailers in Japan. A return to inflation would be supportive of depressed margins for the company, and management is also considering spinning off property holdings into a REIT, which would generate significant cash flow for shareholders. We have invested in domestic Japanese banks, including Sumitomo Mitsui Trust and Nomura. The latter is a global investment bank, leveraged to a recovery in Japanese M&A and financial market trading volumes.

Tapering talk signals the beginning of the end of the financial crisis

Our longstanding overweight positioning in the US has been rewarded in 2013. The housing led-economic recovery is now much more firmly established than in the rest of the world. Indeed, while markets have recently been concerned that any tapering of quantitative easing (QE) could have a negative impact on financial markets, we take a longer term view and regard the increasing momentum that is prompting discussion of tapering as a positive development. We welcome the return to normality following the adoption of unconventional monetary policies to deal with the effects of the global financial crisis.

Our positioning favours cyclical sectors, in particular, companies exposed to the shale energy revolution and to rising consumer spending. We see potential in beneficiaries of the growing e-commerce sector, such as eBay, and in companies providing non-cash payment solutions including credit card companies such as American Express, Mastercard and Discover.

Stock-picking offers value in emerging markets

Emerging markets have come under considerable pressure recently following the change in direction of US monetary policy. Those emerging economies reliant on foreign capital inflows to fund their current-account deficits have been particularly affected. Valuations appear increasingly attractive, and emerging economies in general are much better placed than they were during earlier cycles of monetary tightening, such as in 1994. Although we remain concerned about countries with large current-account deficits, such as India and Indonesia, we are more confident in those economies that are in a balanced or surplus current-account position. We believe that the differentiation in performance between countries/sectors in emerging markets will continue and prefer export-oriented economies such as Thailand and Mexico, at this stage in the cycle, as they should benefit from the consumer recovery in the developed world.

Technology and consumer discretionary sectors appeal

Turning to the sectors that we favour globally, we remain overweight consumer discretionary and technology stocks. We think the former offers good growth potential, while the latter trades on undemanding valuations with management under increasing pressure to reward shareholders through share buybacks and dividends.

We own Priceline.com, a travel comparison website. The company’s flagship website booking.com continues to expand as consumers turn to the internet to book accommodation. Further intergration with Kayak, a popular flight comparison website, has seen booking.com win market share from its largest online travel agent competitor Expedia.

Samsung remains one of our favoured technology companies. It has underperformed this year as the market fearsmargins for the key mobile division will decline. We like the company’s increasingly dominant position in the smart phone and wider technology industry, and see competitors falling by the wayside. We believe the market is pricing in an overly severe deterioration in margins, and that, at the current low valuation, the stock is attractive.

Outlook

We are concerned that any deterioration in the eurozone could once again harm global investor sentiment. There is a suspicion that potential problems in the eurozone may have been deferred until after the general election in Germany in September. The German public appears to be increasingly weary of being asked to bail-out troubled peripheral countries. Another concern is that a slowdown in the emerging economies impacts companies such as Nestle, which have been profiting from the rise of the emerging consumer.

Overall, we anticipate that global equities will encounter volatility in the final quarter of the year as investors weigh the likelihood and timing of QE tapering. The speed and scale of its implementation will be critical. However, we remain positive on the outlook for global equities given the strong underlying fundamentals in the form of increasing economic growth in the developed world. Moreover, we believe that concern over the impact of tapering may have been exaggerated, believing that it signals a return to normal conditions.

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“The recent rise in bond yields, and the accompanying increased volatility, is potentially very informative about ‘what next’ for global markets. As we move through the next phase of policy responses to an over indebted and slow growing developed world, we have to consider how markets might respond to the withdrawal of QE, particularly in the US.
 
“The Fed minutes have started to cover what might prompt the authorities to reduce (or taper) the bond purchase programme and alongside some stronger data this has led to a rise in core bond yields. Whilst we do not expect short term interest rates to rise anytime soon, were growth to pick up and QE to be withdrawn or reduced, there is no doubt that the yield curve would steepen materially from here. The recent bond sell off is probably the first indication of how markets might respond to this environment. What is perhaps more informative is how the non-core bond markets have reacted. In particular the sharp sell-off in emerging market bonds is potentially a foretaste of what is to come if this trend becomes more substantive.
 
“Being short government bonds and overweight credit and EM debt feels very consensual, driven by a global search for income in a low yield world, and the move to the exit could very quickly turn into a stampede from what has historically been an illiquid set of assets. Although an improving global growth outlook is not necessarily our central case, the US continues to show signs of improvement, and as we move through the year, we move ever closer to QE withdrawal. Given the recent performance of EM, we think it is only prudent and sensible to start to reduce our large overweight in investment grade credit.
 
“The other hugely volatile asset class recently has been Japanese equities which have retreated from their highs of a couple of weeks ago. We are still at the very early stages of properly understanding the full consequences and impact of “Abenomics”. However, there is no doubt that the authorities mean business, and intend to do whatever it takes to stimulate the economy and the liquidity taps are well and truly open. Although the Yen has stopped weakening for the time being, it is now at a level where Japanese industry is very competitive, particularly against the other Asian economies. We expect there to be a substantial improvement in Japanese profitability and earnings and think the equity market selloff is an opportunity to increase our exposure. As a result we are slightly adding to our Japanese equity position and will look to increase on further market weakness.”

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Without doubt, the most significant economic development of 2013 has been the transformation of economic policy in Japan. The authorities have planned a massive monetary injection, combined with a fiscal stimulus and other reforms to encourage growth. Unlike previous attempts by the Japanese to fight their way out of deflation, the size of the package and the determined manner in which it has been implemented, has surprised nearly all observers.

There are clearly still difficult structural issues, which haven’t gone away but the effects of the package, combined with a much weaker yen and the consumption tax that is expected next year, which should bring forward expenditure, could be significant. We forecast 1.5% GDP this year and next, both a little above consensus forecasts.

In the US, we see reasonable growth ahead, despite the tightening of fiscal policy, as the economy appears to have built up useful momentum.  Following recent revisions, it appears that employment has shown steady growth this year and the housing market continues to display a healthy recovery.

We are looking for 2.0% GDP in 2013 and a further pick-up to 2.5% in 2014. 

Eurozone economic activity remains very weak due to fiscal austerity and credit constraints. The recent softening of French activity is an increasing concern, and shows that the region’s problems are not confined to the periphery. Germany is also proving less of a positive factor than was previously the case, and is suffering from euro appreciation against some important competitors. 

We expect a fall in eurozone GDP of 0.5% in the current year, followed by some recovery to 0.5% growth in 2014. The UK just managed to achieve positive growth in Q1 and we retain our forecast for a 1.0% increase in GDP for the year as a whole. The weak eurozone has hit the UK’s trade balance, but a moderately surprising level of employment growth, a fall in oil prices and the Chancellor’s budget stimulus to the housing market should help consumption. We look for expansion next year of 1.5%.

Our forecasts for a pedestrian global economic recovery lead us to favour quality companies, with good dividend yields, in the more defensive areas. This strategy has been successful and consequently businesses with these profiles have become fairly expensively rated relative to other areas.  We continue to favour this broad stance, but we have looked selectively to add to some of the more cyclical stocks, which have underperformed, as we seek value.

Equity markets have continued to show resilience despite a mediocre corporate reporting season and slow economies.  We believe this is due to markets continuing to display relatively attractive levels of valuations and on account of the impact of global quantitative easing. 

This makes low risk investments increasingly unattractive and pushes liquidity into other assets. While valuations remain satisfactory, economies show some recovery and easy money continues, we believe it is right to remain above benchmark in equities.

Government bonds on the other hand have moved to unattractive yields and we have underweight holdings.  At some point, yields will rise but it may not be imminent as central banks will endeavour to keep yields low to encourage growth. We continue to see better value in corporate and emerging market debt. These asset classes are enjoying healthy fundamentals and buoyant inflows, as investors search for higher yields.

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However, the last 15 years have shown that investing in companies that pay high dividends has actually resulted in superior total returns. 

As shown in the chart below, the MSCI World High Dividend index underperformed in the dot-com boom, but was resilient when the bubble burst, and through the difficult early 2000s. 

High dividend strategy has outperformed

Dividend investing then outperformed in the five years leading up to the financial crisis, but underperformed during the height of the crisis in late 2008. 

A closer look at the High Dividend index in 2008 shows that a 30% concentration in bank stocks (which were healthy dividend payers) was the culprit. 

Since the beginning of the recovery in 2009, high dividend stocks have continued to outperform – and investor interest in dividend investing has grown steadily.   

According to Stephen Thornber, Portfolio Manager, Global Equity Income, at Threadneedle Investments, it is also important to note that the outperformance of high dividend investing is not just a result of investors seeking yield in a low-yield environment. If that were true, rising interest rates between 2005 and 2008 would have resulted in underperformance, which did not occur. 

“In our view there are persistent reasons why high dividend investing has outperformed, and can continue to outperform. We believe that behavioural biases, including illusion of control and over-confidence, can result in management overestimating prospects and the likely return on capital from projects,” Mr Thornber said.  

“Company management teams that are accountable for high and regular dividend distributions, on the other hand, are forced to be more disciplined when deciding how to deploy capital.  As a result, the company is less likely to undertake value destroying projects, and will be more efficient with its capital investments,” Mr Thornber said.

“Much has been written about the conflicts of interests between company management and shareholders.  In recent years, closer ties between pay and shareholder returns have been implemented by many companies to reduce this problem.  We believe that companies that pay high dividends are less affected by this problem than others and that commitment to a regular and high dividend sets a healthy management culture.  In our experience, it is also companies with high insider ownership that typically take a progressive approach to dividends and ultimately deliver the most consistent returns to shareholders over time,” he said.

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The recent policy initiatives introduced by the Bank of Japan (BOJ) are the latest in this long and bewildering chain of events as central banks attempt to offset the many and varied deflationary forces brought about by deleveraging and the accompanying austerity measures.

Having been hitherto staunchly conservative, investors are rightly stunned at the scale of Japanese QE, where the central bank has started a programme of stimulus on a massive scale.

Where the Fed may have surprised investors initially with its programme of $85bn a month, or 7% of GDP, the BOJ have trumped that with its programme of 15% of GDP, an unprecedented move. This will see it buying 1.6x net supply, completely and deliberately crowding out traditional investor and swamping the markets with further liquidity.

This has not surprisingly seen the Yen fall sharply, and has prompted a big stock market rally. The intention of the BOJ is to end 20 years of deflation and get inflation up to 2% pa by forcing investors out of bonds and into riskier assets.

It will also force domestic Japanese investors to look overseas for their returns;  with the prospects of  a non-existent bond yield, and a depreciating currency, why wouldn’t they seek a return in higher yielding foreign bond markets? Faced with a decline in the domestic population of 30%, I suspect the reflationary policies will ultimately fail, but at least the authorities are giving it their best shot.

The irony is that the underpinning this gives to risk assets feels at odds with both fundamentals, and leading indicators. Equity markets have performed well this year, but earnings revisions have turned negative and growth prospects have been downgraded, both for corporates and for sovereigns.

Within equities, cyclicals have underperformed defensives, emerging markets have underperformed the developed markets and commodities have been under pressure. It doesn’t feel like the backdrop to positive equity returns. Within Europe the recent Cypriot bailout is an additional reminder as to the fragility of the Eurozone and its financial system, and is a worrying precedent for the periphery as to what the future may look like.

Indeed, it runs the risk of undermining the banking system further by prompting deposit flight from the domestic banks. Growth appears to be difficult to come by, and the recent downgrade to growth expectations in France is the latest disappointment to hit the region.

The banking system in the US looks to be much better capitalised and well placed to fund the credit expansion required by a growing economy. Although the housing market continues to recover, the latest job statistics appear to show that growth is again slowing, in all likelihood finally reflecting the impact of the fiscal cliff impasse.

Until this is resolved, it is difficult to see confidence truly recovering, and there will of course remain the real and meaningful impact of the spending cuts and tax rises acting as a headwind to growth.

But if investors have learnt anything over the last couple of years, it is that despite anaemic growth, faced with a tidal wave of developed world QE, they ultimately have nowhere to go other than equities, not least of all because of the yield pickup offered by this asset class.

It should perhaps come as no surprise that in nearly all regions of the world, the income and higher yielding strategies have been the best performing. As long as the central bank taps are turned on I expect this trend to continue.

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Global equities pave their way

Investors’ appetite for income shows no sign of abating in 2013, but with interest rates and bond yields at historically low levels, their eyes are increasingly turning to global equities for dividend income and the prospect of capital performance.

But not all global equities are created equal, and real success lies in picking the right ones, explains Stephen Thornber, Portfolio Manager, Global Equity Income, at Threadneedle Investments.
 
“Investors have been asking me whether the renewed focus on income means that income stocks are expensive now,” he said. “My response is that, high dividend paying stocks have historically traded at a discount to the broader market, and this discount is actually higher now than it was two years ago.”
 
Mr Thornber said that Threadneedle’s belief in fundamental, bottom-up stock selection, informed by top-down economic and thematic inputs as a key driver of returns has translated into strong performance from its Global Equity Income strategies.
 
“Following the GFC many companies strengthened their balance sheets by paying down debt and reducing costs, however recently corporates have been increasingly rewarding shareholders through higher dividend payments.”
 
In November last year Certitude Global Investors launched the Threadneedle Global Equity Income Fund (Unhedged), an Australian registered investment management scheme which invests in the actively managed Threadneedle Global Equity Income Fund. The Threadneedle Global Equity Income Fund has consistently outperformed its benchmark, the MSCI AC World Index, over 1, 3 and 5 years, providing annualised returns of 19.8%, 15.4% and 5.2% respectively, to 31 January 2013*.
 
“We look for companies with ‘quality’ income, which for us means three things.  Firstly, we insist on a minimum yield of 4%, as every stock has to contribute to achieving a high portfolio yield.  Secondly, we seek dynamic companies that are growing earnings and dividends, and lastly we look for companies with a robust balance sheet, which gives us confidence in future dividends and the ability of the company to invest in growth,” Mr Thornber explained.
 
Meeting these criteria does not mean a stock is automatically held, rigorous fundamental research is conducted to investigate which opportunities are the most attractive.  The focus of the investment team turns to fundamentals, such as industry dynamics, competitive advantage, margins, free cash flow generation and quality of management in order to produce a valuation price target.
 
Mr Thornber finished by saying that risk control was also central to good portfolio construction and by investing globally he is able to construct a portfolio that is well diversified by sector as well as geography.  “In Australia the big four banks and BHP account for nearly half of all dividends paid.  By investing globally we spread the risk far more widely while still generating a high portfolio yield.”

 
* Annualised gross returns to 31 January 2013, in USD

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Scramble for yield favours high income global equities

If investor sentiment in 2012 was characterised by a flight to the safe haven of cash and bonds, 2013 is likely present new and different challenges, as interest rates remain at historically low levels and cash struggles to provide acceptable returns. 

Battle weary investors are starting to look further afield and ask where the smart money can find outperformance now.
 
The answer could well be high yielding global equities, says Stephen Thornber, Portfolio Manager at Threadneedle Investments. 

“In the current low yield world, the right global equities have the potential to give investors both a stable source of income, as well as potential capital growth,” he says, “and for investors looking for a reason to exit the save haven assets, that’s a heady mix.”
 
Mr Thornber explained that the move to cash in 2012 was the result of investors trying to mitigate the risks associated with three key global themes; the fiscal cliff, the effect of the leadership transition in China, and the drag of the Eurozone crisis.  

“Any uncertainty unsettles markets, and investors were understandably attracted to the safety of cash and bonds,” he said.
 
This year however, the situation is quite different.  Mr Thornber explained that as 2013 unfolds, fears of impending doom are starting to abate.

“There is increasing optimism about the global economy,” he explained “a compromise was reached on the fiscal cliff, concern over the Eurozone is starting to ebb, and signs are emerging that the Chinese economy is picking up pace.” 
 
However, interest rates remain at historically low levels, and with global economic growth still sluggish, this is unlikely to change in the near future.  Cash will not be able to provide the high returns and income that investors, particularly those heading into retirement, are looking for.  All of these factors have combined to encourage investors back into risk assets such as equities as a means of taking advantage of the potential upside associated with improving global economic conditions.
 
Mr Thornber said that contrary to what some investors might think, global equities have been relatively stable over long periods of time, and that on a yield basis alone, are still holding up well.
 
“And while many high yield assets are becoming more and more expensive, many equities, relatively speaking, are cheap at the moment.  And what makes high yield global equities even more attractive to us is that we are starting to see payout ratios increase in the US, Europe and Asia.”
 
“Following the GFC, many companies sought to protect and consolidate their balance sheets and as a result there was a significant compression in payout ratios.  However, with improved global economic data and stronger corporate profits in many sectors, payout ratios are starting to improve,” he explained.
 
Mr Thornber concluded by saying that he believes investors will continue to rotate into risk assets in 2013, but only where there are prospects of real returns. 

“And that’s where Threadneedle’s Global Equity Income strategies have been able to perform well.  We leverage the insights of colleagues from across the investment floor covering various asset classes to gain a better perspective and understanding of the key macroeconomic developments and themes that are likely to play out. We then pick stocks that meet our yield targets and also provide the potential for sustainable growth,” he said.

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“Looking back on 2012, it would be fair to say that given the difficult macro backdrop and the many challenges facing the developed world, risk assets performed much better than many commentators had expected. Within equities, most markets gave comfortable double digit returns despite modestly weakening corporate profits, and negative revisions to GDP growth.

Within fixed income, credit and emerging market debt performed well, with returns positively correlated with the riskiness of the investment. Only core Government bond markets gave a disappointing return, but then given the starting yield that was always going to be the case.

As we have discussed many times, there were two key drivers to this outcome: In a low interest rate environment, income starved investors were forced to seek out alternative yielding assets and became increasingly more adventurous in the types of investments they considered. The central banks’ various QE policies both crowded out investors, exacerbating this trend, and provided a favourable liquidity backdrop to the market and saw all credit spreads narrow significantly.

The second driver was the very robust performance of corporate balance sheets. Companies are at a multiyear high in terms of their financial strength, with record profit margins and prodigious cash flow. As a result the risk of default or bankruptcy, despite the challenging macro backdrop, was deemed low. Investors therefore became increasingly confident of the safety of both their dividends and corporate bond coupons, and rerated asset classes accordingly.

This also acted as a catalyst to corporate treasurers to kick-start the bond issuance pipeline and take advantage of the falling cost of corporate debt, even if the cash was used for nothing more than share buy-backs (which in itself was value accretive).
 
This all begs the question as to how 2013 might turn out given how well markets have performed over the last 12 months. It is our view that we should still have a satisfactory year. The defining feature is still going to be the zero interest rate environment.

Developed world growth is still low by historic standards, western economies are over indebted and the financial system is undercapitalised: Interest rates aren’t going up any time soon. This will continue to force investors to seek out yielding assets and will provide markets with the support it provided last year.

However, in our view things are getting a little better: In China we have seen the leadership transition and the end of the accompanying uncertainty has been a boost for both growth and the Chinese stockmarket. In the US, it remains our view that, although it is not yet resolved, a compromise will be reached on the fiscal cliff and this too should provide a boost to growth. In any event, the US housing market continues to recover from very low levels which is supportive of the US banking sector and consumer sentiment.

In Europe (both UK and continental), while we are likely to be in mild recession this year, the situation does not appear to be getting any worse and it is probable that the worst of the problems of the banking system are behind us.
 
Against this backdrop, it is no surprise that markets have had such a positive start to the year, and it may well be that some profit-taking is in order. Nevertheless, we retain our overweight position to risk assets and expect equities in particular to make further positive progress in 2013.

On a number of metrics, valuations are still supportive, and at some stage the M&A cycle will pick up as companies put their cash to work constructively. Our stance is therefore predicated on a safe middle ground- some growth so that economies can continue to rebuild and repair the damage done by the global financial crisis, but not too much growth so that rates remain low. For now we appear on track, but we will clearly monitor developments very closely.”

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