February Market and Economic Update 2016

Economic outlook

Core sovereign bonds were one of the few bright spots for investors in January as events in China, further falls in the oil price and rising risks of a US recession weighed on global equity and high yield bond markets. Recognised global equity indices briefly touched bear market territory, but subsequently managed to claw back losses partially, after Central bank communications and a rebound in oil offered support.

Our view – asset allocation summary

• Normal economic recovery expectations are excessively optimistic, and we remain more dovish on the US interest rate cycle than both the US Federal Reserve and current market expectations.
• We are watching global monetary policies closely, but we see a growing risk that Central banks are losing control of global markets as policies such as Quantitative Easing (QE) become discredited. We may see a shift in focus to fiscal policy action as politicians globally respond to the wealth inequality that recent policies have exacerbated.
• We believe our current cautious stance remains appropriate as we move into 2016. Significant challenges including potential Chinese defaults and currency devaluation loom large, but the timing of these is highly uncertain. After significant de-risking to the asset models in 2015, particularly in the second half, the asset allocation committee decided at its January meeting to limit further de-risking to the sub-asset class level.

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