Economic and Bond Market Outlook
Our constructive view on the medium-term global growth outlook rests on the conviction that central banks globally are still pursuing an accommodative policy.  Central bank rates in all major currency areas are still below neutral levels on our numbers.  Structurally, this should bode well for global economic growth, as financing conditions for the private sector remain attractive:  Their rate of return on invested capital exceeds the cost of capital.  Nevertheless, accommodative monetary policy does not rule out cyclicality due to exogenous shocks or changes in fiscal policy.

Equity Market Outlook and Asset Allocation
Our medium-term outlook for equities remains positive.  We believe that, over the next 12 months, equities should rise roughly in line with earnings growth – i.e., by 5-10% globally (the total return is higher by around 2-3% when adding dividends and net share buybacks).

Continental Europe Outlook
The European economic landscape has been one of little change.  The trends of the previous quarters are to a large extent still present.  In Q4 2006, the European Monetary Union (EMU) economy grew at an annual rate of 3.3%, bouncing back from a temporary slowdown in Q3.  Internal demand has remained the main driver of growth, with consumption and investment expanding respectively at annual rates of 2.2% and 5.0%, and contributing respectively 1.2% and 1% to the quarterly performance (i.e., two-thirds of the overall growth rate).  The additional boost to growth came from net exports, thanks to the fall in the oil price during Q4.  Nominal GDP growth accelerated from 4.6% to 4.8% year over year (YoY).

U.K. Outlook
The main, and worrying, feature of the present U.K. economy is excess inflation.  The Bank of England believes that “the risks to growth are judged to be balanced [while] the risks to inflation are weighted to the downside in the near term and to the upside in the medium term.”  While we are happy with the comment on growth, we believe that the risk to inflation is unambiguously weighted to the upside, hence our fear that rates may have to rise higher and stay higher for longer than the market currently anticipates.

Japan Outlook
GDP data for the period October to December 2006 was stronger than expected, with an annual growth rate of 5.5%.  Although some feel concern that the recovery in consumption is only due to a rebound from the low growth of the previous quarter, evidence would suggest that the Japanese economy is by no means falling into a recession.

Asia-Pacific Outlook
Asian growth should be robust throughout 2007:  We expect China and India to grow 9.5% and 9%, respectively. This growth will be fuelled by strong domestic consumption, a current trend that is set to continue.  However, export growth is likely to be somewhat slower given softer global growth and the appreciating Asian currencies.