As noted above, the most obvious tactical bump in the road ahead is the prospective normalization of monetary conditions, but we doubt it is imminent.
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A shorter-term setback for stocks meanwhile still feels overdue, but we continue to doubt it will be big enough to warrant a tactical repositioning of portfolios. We stay overweight developed equities: markets are still not expensive, in marked contrast to most fixed income assets, where we advise a strategically small position in government bonds and a tactical underweight in investment grade credit (and cash). We remain neutral on emerging equities and on diversifying assets. †
Figure 1: Tactical Asset Allocation tilts and Strategic Asset Allocation Benchmark (moderate risk profile)
Figure 2: Total returns across key global asset classes
* As of 24 May 2013; ** As of 23 May 2013 † Diversification does not guarantee against losses.
Note: Past performance is not an indication of future performance. Index Total Returns are represented by the following: Cash and Short-maturity Bonds by Barclays US Treasury Bills; Developed Government Bonds by Barclays Global Treasury; Investment Grade Bonds by Barclays Global Aggregate – Corporates; High-Yield and Emerging Markets Bonds by Barclays Global High Yield, Barclays EM Hard Currency Aggregate & Barclays EM Local Currency Government; Developed Markets Equities by MSCI World Index; Emerging Markets Equities by MSCI EM; Commodities by DJ UBS Commodity TR Index; Real Estate by FTSE EPRA/NAREIT Developed; Alternative Trading Strategies by HFRX Global Hedge Fund. The benchmark indices are used for comparison purposes only and this comparison should not be understood to mean that there will necessarily be a correlation between actual returns and these benchmarks. It is not possible to invest in these indices and the indices are not subject to any fees or expenses. It should not be assumed that investment will be made in any specific securities that comprise the indices. The volatility of the indices may be materially different than that of the hypothetical portfolio.