Wednesday, March 21st, 2012

Global Equity Models Commentary 21/03/2012

(This commentary was written originally specifically for the Sterling Global Equity Model)

Market conditions

Returns from the UK bond market have held up slightly better than those of the US, partly because there is still the possibility of further QE from the Bank of England. Nonetheless it now appears that volatility has troughed, which means that the hurdle rate which risk assets need to beat is likely to fall in coming weeks. All other things being equal, this is a positive for risk assets.

We do not expect any major fluctuations in sterling exchange rates, but they are unlikely to strengthen in the near future. This means the portfolio will tend to prefer overseas equities to the FTSE, despite the latter’s relatively cheap valuation against some markets.

Current portfolio

US equities continue to be the model’s favourite asset class followed by Emerging Market and UK equities. UK bonds are still preferred to Eurozone and Japanese equities. The biggest increases in weight have come in US and emerging market equities, with UK bonds as the only significant decrease in recent weeks. UK assets now account for less than 30% of the portfolio as opposed to nearly 50% four weeks ago


We expect further modest increases in the exposure to overseas assets, but within that we would expect emerging markets to start to overhaul the US within the next weeks, provided that the level of excess volatility continues to fall.

As we move into the second quarter, the focus of the markets will shift from restoring the liquidity position of countries in the Eurozone periphery to recapitalising its core banks. Direct exposure to the Eurozone is very low, but the process is bound to have an effect on sentiment towards the UK financial sector and the UK market in general. This may be another reason to increase exposure to Emerging Markets.

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