Global Debates Playbook
Why So Cautious?

When we reiterate our cautious strategic risk view, the question from investors is why? The reasons are straightforward: 1) We’re skeptical that US growth can accelerate, and while more optimistic than most on China, uncertainty remains high. 2) The high oil price is already a risk to growth. 3) The crisis in Europe is far from over, with sovereign yields again moving higher. 4) Valuations are close to long run averages, with only modest upside before becoming rich.

It’s all about growth, and China is the wildcard. The latest data from Europe and China have disappointed, while it’s mixed in the US. Seasonal factors — warm US winter, China’s New Year — are compounding the data interpretation problem. However, the new optimism for the US and pessimism for China is overdone, in our view. Of the two, China is the harder call because the range of outcomes is greater, thus driving both upside and downside risks.

Hold off on the asset reallocation from bonds to equities. The rise in rates has renewed the debate about whether it’s time to reallocate out of bonds and back into equities. In 2010 during a similar debate, the substantial flows into bonds, and out of equities, was largely uninterrupted. Thus, we believe a much bigger rate move and for a much longer period is needed to actually trigger a significant reversal in asset allocation flows.

Staying cautiously positioned in the new risk regime. No major changes to our asset allocation after reducing risk last month. Equities, the USD and Treasuries have all signaled risk-on this month, suggesting risk-on correlations have changed. However, we don’t expect this risk-on regime to continue.

Table of Contents
Global Cross-Asset Strategy
Global Cross-Asset Strategy Overview 3
Market Commentary 4
Risk-Reward Views: Economics
Global Economics 25
US 26
Europe 27
Japan 28
China 29
Asia ex-Japan 30
Brazil / Latam 31
India 32
Russia 33
Risk-Reward Views: Strategy
Europe Rates 34
UK Rates 35
EM Fixed Income 36
G10 Currency 37
EM Currency 38
US Equities 39
Europe Equities 40
Japan Equities 41
Asia / GEMs Equities 42
US Corporate Credit 43
Europe Corporate Credit 44
Asia Corporate Credit 45
Global Credit Derivatives 46
Commodities: Oil 47
Volatility Across Asset Classes 48