We have prepared ourselves for an increase in our own, as well as in our recommended, equity overweight from 5 to 8 percentage points. The increase will be allocated solely to Emerging Markets and will be funded through an increase in the government bond underweight. However, it has not been executed yet as we are looking for markets to stabilise a bit. The magnitude of the increase reflects the current nervous market conditions; we do not expect equities to fall much further from their current levels, but should we be wrong, we intend to increase our weighting further, i.e. on top of the 8 percent. We will send out a comment on the day that we execute the initial allocation change.
To us, the Fed discussion over the past 12 months has been about whether or not they would need to ease to underpin growth, not if they would need to cut to prevent a recession. We have long been arguing that the Fed would not need to cut – which in the end proved wrong! However, the consequences of the Fed’s future actions are much more important than the eventual action itself. We think the main reason why we were wrong about the Fed is twofold – we underestimated the magnitude and duration of the current dislocations in the money markets and we underestimated the consequences of the shock to the US economy from higher energy prices in H1. To us, however, the effects of the financial turmoil over the past month means that the US will grow below trend for longer than anticipated and such a scenario is by far the most positive scenario for global equities – Fed easing is just an added bonus. As we also disagree significantly with what is priced in interest rate markets, we judge this to be a good time to readjust the level of risk in our portfolios to better reflect the improved outlook.
Read the entire newsletter (Sept. 2007) (PDF: 354kb)