What’s in this issue?
Alain Kerneis, Head of Strategy and Market Views within Client Solutions, discusses what Brexit means for long-term asset allocation.
In the Q2 issue we focus on:
1. Lower returns after Brexit
This quarter we have again lowered our return forecasts for most asset classes, reflecting a further fall in bond yields and our reduced global growth expectations following the UK’s vote to leave the EU. On a five-year time horizon, we still expect higher returns from equities than fixed income, but we recognise that the uncertainty around our central macro scenario has increased. Within fixed income, we favour emerging market debt and high yield.
2. Dialling down risk in the strategic portfolio
We have reduced the equity allocation in our strategic portfolio to neutral relative to our long-term benchmark. We have also increased the allocation to fixed income given increased uncertainty. Private markets and active management may help compensate for the compressed return environment.
3. Credit risk and IAS 19
Under the international accounting framework, IAS 19, pension liabilities come with credit risk. We examine the best approach for hedging that risk given the difficulty in finding suitable matching assets and the effect of potential downgrades. We conclude that a holistic approach that takes into account all risk factors, most notably interest rate and inflation risk, is most suitable.
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