Monday, April 23rd, 2012

Global Equity Models Commentary 23/04/2012

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

Market conditions

Profit-taking in equities continues apace, and there seems to be little reason why this should change before the month end given the uncertainties of the French elections and turmoil within the Dutch coalition. The IMF continues to highlight the urgent need for European banks to rebuild their balance sheets, some of which will probably happen during Q2 and Q3. We suspect it will be difficult to persuade investors to buy ahead of this.

Current portfolio

US equities remain the favourite asset class but the model is no longer adding to this position. Emerging markets should be the asset class which is most likely to benefit from the US economic recovery, but it is worth noting that returns have now been negative for seven weeks in a row. The biggest increase in weighing has happened in UK equities, where recent economic data has surprised on the upside.

Outlook

We had hoped that the trend towards emerging markets would be clearly established by now, but the lack of performance is now becoming a problem. Unless this is turned around in the next few weeks, the model will be forced to increase its weighting in UK bonds, and yet another rally will have run into the sand.

QE3, and maybe QE4, remain in the gift of the Fed and the ECB, but unless they are accompanied by other measures, they are likely to be subject to the law of diminishing returns. We suspect 2012 will be another year where UK investors will have to make do with single-digit returns.

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