The Road to Sustainable Economy

The global economic recovery continues to build, but it is proving to be hard work. Structural change was never going to be easy. The early signs are that the necessary rebalancing we need to see for a sustained recovery in global growth is starting to occur.

The next task is the management of the "Great Unwinding", the unwinding of the extraordinary monetary, fiscal and liquidity measures that were put in place during the darkest days of the crisis. The timing and sequencing of these moves will be critical. The hardest task ahead in many countries will be getting fiscal policy back onto a sustainable path. Governments have got a difficult balancing act ahead as they try to support economic growth, maintain entitlements, cope with sharply lower revenue and try to keep public debt in check.
Indeed sovereign risk moved to the fore over the quarter as concerns over Greece's fiscal accounts shook investors into taking a harder look at other countries' finances. Elevated budget deficits present upside risk to bond yields, particularly in the US and UK. We have therefore reduced our global bond allocation, placing the funds in domestic cash. With the global economy recovering and corporate profits rising, decreasing the equity allocation is too costly insurance at this stage.

There is still a long way to go in the global recovery, but should the next set of risks be successfully traversed, we could in future look back on recent developments as the dawning of a new age of global prosperity.

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