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Investment Directors’ Bulletin
Edmund Brandt/Ed Walker December 2014

EQUITY MARKETS BOUNCE STRONGLY IN NOVEMBER, LED BY THE US
From early September to mid October the MSCI World and MSCI Emerging Markets indices completed a near 10% correction—the first since mid 2011. However, the recovery since then has been led by developed markets, particularly the US, while emerging markets (particularly when measured in US dollars) have traded broadly sideways with significant country variations. In November, the MSCI World and MSCI Emerging Market indices rose 2.9% and 1.1% in local currency terms, respectively. Among developed markets, Japan was the …show more content…

However, with such a sudden dislocation there are likely to be consequences that are much harder to predict. These could be both geopolitical, given the severe budgetary pressures on nations such as Russia and Iran, as well as economic. The depth and duration of the decline will in part determine these effects. We should also brace for higher volatility in the short term as certain positions become “crowded” and these complex interactions become more apparent in the months ahead.

FOR INVESTORS TO HIT THEIR TARGET RETURNS, AN OVERWEIGHT POSITION IN EQUITIES REMAINS NECESSARY
We continue to believe that investors should remain overweight equities on a 12-month view. Equity valuations are still positively cheap relative to government bonds and other areas of fixed income. G7 central bank policies remain very supportive for risk assets. Investors’ key priority for 2015 will be to seek additional returns, in order to hit an overall return target of somewhere between 5%-8% for a typical multi-asset institutional portfolio. Long-term capital return assumptions for fixed income have declined throughout 2014 as government bond yields have fallen, contrary to most expectations, and spreads have overall declined for riskier fixed income securities. Given this backdrop it does not seem the right time to cut back equity exposure, from a strategic point of view. The Merrill Lynch Fund Manager Survey confirms this is not a minority view with 63% of respondents believing

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