Monday, July 2nd, 2012

Multi Asset Model Commentary 02/07/2012

(This commentary was written originally specifically for the US Dollar Multi-Asset Model)

Market conditions

The EU Summit produced more favourable news flow than expected at the beginning of last week, but as ever the remedies are in the medium term, even though the problems are immediate and pressing. The best that can be said is that the politicians did not fall any further behind the curve. As we said last week, the market is in the process of turning its attention away from the euro crisis and towards the US Q2 results season. Today’s weaker than expected ISM report does not augur well in that regard.

Current positions

There is no significant change to the recommended asset allocation, with the two largest positions remaining US Treasuries and REITs, as it has done for the last few weeks. As this is the end of the Q2, some historical perspective is probably useful. The portfolio at the end of June is almost exactly the same as it was at the end of 2011, with one the exception of REITs. These comprise some 30% of the portfolio compared with less 10% at the end of 2011. The difference of 20% is all reflected in lower holdings of US Treasuries. We believe that REITs backed by prime commercial property will remain attractive to investors seeking high running yields as well as the inflation protection offered by the potential for rising rental income.

Outlook

There is more nervousness ahead of Q2 results than there has been for some time. Earnings estimates for the S&P500 over the next 12 months suggest growth of some 17% in aggregate, which looks too high, unless there is a remarkable swing in the financials segment. In any case we would expect that improvement, if it happens, to be back-end loaded in 2013 and therefore outside the current 12 month horizon. Excess volatility can fall further  – for US equities in particular – but the only real catalyst would be QE3, and this probably requires more bad news in the short term.

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