Economic overview and summary of our asset allocation decisions

Global equity markets continued their post-Brexit rally in July. The majority of markets are now back to or above pre-Brexit levels, with the likelihood of further stimulus from Central banks a key driver. This was also a key feature behind fixed income returns in July, with gilt yields continuing their downward trend to historic lows, while sterling credit performed strongly in expectation of the Bank of England (BoE) purchasing corporate bonds.

Asset allocation changes – general summary

• The medium-term global economic outlook has deteriorated and a recession in the near future is now a live possibility. Clearly for the UK and Europe, the EU referendum has potentially brought forward the onset of the downturn, while the challenges in the US have been flagged for some time.
• We are increasingly cautious on the European economic situation, and while we have not reduced exposure, instrument selection should favour those stocks that are less exposed to the domestic EU economy and are more tied to overseas revenues, such as Europe-based multinationals
• Market interest rate expectations, particularly in the US, have fallen significantly and are now much more closely aligned with our house view. This reduces some of the potential upside for sovereign bonds, though the potential remains for further gains from short-term buying pressure driven by deteriorating sentiment
• At its July meeting the Asset Allocation Committee made the decision to increase the allocation to gold in the centralised models, which provides attractive diversification benefits and is expected to be favoured by investors as a store of wealth amid ongoing unconventional monetary policy and volatile currency markets. Against this, the committee has reduced exposure to sovereign bonds and property.

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