Quarterly Global Outlook-July

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July 1, 2014

Our economic outlook is based on a return to growth potential of the global economy, with converging growth rates between developed and emerging countries. Monetary policy is expected to be accommodative, although central banks’ actions will likely not be synchronized. Inflation should also remain contained, with deflation seen as a tail risk event.

The current economic environment of low growth, low inflation and loose monetary policies advocates for low volatility and low bond yields. This scenario, coupled with positive expected earnings growth, should be supportive for risky assets. The recent rally in risky assets has largely closed the valuation gaps, but with significant differences across regions. From a fundamental point of view, dividend yields are still supportive for European equities. Emerging Markets remain the most undervalued area.

Compared to the initial part of the year, we call for a more cautious stance, because some of the tactical indicators seem to be losing momentum. As a consequence, we have implemented some hedging positions against tail risks, but we remain long risky assets.

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