Whither?

There are five key issues that need to be addressed for investment strategy. First, the rate of global economic growth and its distribution. Second, the evolution of monetary policy in this recovery and deflation risks. Third, the sustainability of the Eurozone recovery. Fourth, rebalancing in China and EMs more broadly. Lastly, geopolitics is back with the prospect of a new cold war between Russia and the West.

Our asset allocation remains similar. The equity story is split between longs in developed markets, and short emerging markets, with an emphasis on the non-reformers that are stuck in the middle-income trap. Yields in developed fixed income should normalise as growth feeds through. A strong euro is adding to “lowflation” in the Eurozone and harms debt sustainability, complicating economic reforms. The US economy should bounce back from the “Polar vortex” and we reaffirm our positive US dollar view.

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