The top six trends driving the outlook for the newly formed investment consulting and insurance giant Willis Towers Watson are combining to provide a generally “mediocre” outlook for markets over the medium term.
In its January global markets paper the firm’s asset research team explains the three-to-five-year asset class weightings. It is a cautious outlook, with a few pockets of potential upside for investors.
In the major asset classes: most sovereign bonds are neutral, including Australia, with the US being moderately overweight and emerging markets being moderately underweight; developed market equities are moderately overweight in Europe and Japan, moderately underweight US and neutral UK, Australia and emerging markets; commodities neutral; and, in currencies versus the US dollar, moderately underweight euro and yen and neutral sterling, yen, Aussie and emerging.
The six big trends from which the forecasts are drawn are:

• Policy divergence. Countries like the US, UK and Germany are facing very different economic conditions from Eurozone, Japan, China and parts of the emerging world. The main implications for capital markets is in currencies, with likely further appreciation in the US dollar.
• Fragility: China risks. China has pushed itself to front and centre as the potential source of a shock which rocks all other markets. The policy challenges of reforming and liberalizing a slowing economy are acute and the risks of a policy error are elevated.
• Fragility: don’t forget the US. While economic conditions in the US are strong compared with the rest of the world, in absolute terms there are still things to worry about, such as: the impact of US rate hikes; and the potential for corporate earnings disappointment.
• Emerging market divergence. China has not been the only source of weak growth. Over-investment in commodities has created excess capacity which will keep any export recovery muted. But the debt and competitive positions of certain key economies are more important influences.
• Low commodity prices. Oil markets remain in a state of oversupply with implications for wider commodity prices because energy is a key production cost. Other commodities, such as iron ore and copper also suffer from over-supply.
• Geopolitical risks and ‘Brexit’. There are a great many flashpoints, as always, but they only deserve consideration when heightened. Terrorism, fallout from the Syrian war, tensions in Saudi Arabia and South China see all exist. One heighted concern is the upcoming referendum on British membership of the EU.

But ending on a brighter note, the report says: “The main upside risk to global growth and asset prices remains the possibility that economies with strong technology sectors will enjoy an external boom in productivity and hiring. If this is occurring to a greater extent than we give credence to, our generally cautious outlook will be proved incorrect.”
Willis Towers Watson will publish its annual ‘Secular Outlook’ report, which goes into each asset class in greater detail, including advice on the best investment policy responses, in February.