The strong rally in risk assets that characterised much of the first quarter petered out towards the end of March. Investors started to worry about the dip in economic news out of the US – viewed as a primary driver of global growth in 2012 – whilst a higher oil price compounded concerns about higher inflation. Furthermore, sentiment weakened towards China, as investors questioned growth rates. In short, we would prefer to focus on trends rather than isolated data points before significantly shifting our allocation.
We remain bullish, despite recent market weakness. We see Ben Bernanke’s suggestion that more quantitative easing will not be forthcoming, as a positive sign that the US economy continues to strengthen. The market has taken this an opportunity to take profits. Having de-risked at the start of March, we are now topping up our equity exposure. The state of the Spanish economy is a risk on the horizon, but we do not believe that it poses a significant threat to the global economy; neither do we see a hard-landing for China. We therefore remain positive on the US, Asia and emerging markets, but we are avoiding Europe.