Executive Summary

As downside risks to the global economy fade, an upturn in growth expectations is affecting asset classes in nuanced ways. In this paper, our investment professionals outline their thoughts and approaches that are currently aligned with improving global growth. The following is a collection of their perspectives across equities, alternatives and fixed income asset classes.
 
Equities
Equity markets represent the obvious beneficiaries of improving global growth. As the U.S. expansion matures, the recovery in developed markets (DMs) spreads to Europe and Japan, and as growth in emerging markets (EMs) slows, our managers are shifting their focus to sectors that are likely to benefit from these changes in the growth cycle over the next few years.
 
Despite the cyclical headwinds, demographic and economic development factors will continue to propel relative economic growth in emerging markets. But the question for investors is not whether they should invest in EMs, but rather, how much exposure should they have and how should they access the EM growth story. International equities (ex-U.S.) are poised to benefit from increasing prospects of economic recovery in the euro area and the impact of “Abenomics” in Japan. In Europe, growth expectations have improved, while equity valuations of European companies remain attractive. Our U.S. equity managers expect that the U.S. will emerge as the strongest “developing” market.
 
Alternatives
Alternative asset classes include real estate, infrastructure, hedge funds and private equity investments. While real assets, such as real estate and infrastructure, typically display a high degree of leverage to business cycle upturns, hedge funds and private equity perhaps feature the least sensitivity to near-term changes in the economic environment, since managers are generally seeking pure alpha that is uncorrelated to traditional public-market betas. Still, our managers are finding alpha opportunities through the shifting global trends. 
 
Fixed Income
While many investors have likely been shrinking the hedge portions of their portfolios, fixed income retains an important role in asset allocation. Some parts of the fixed income universe will benefit from stronger growth expectations. Our managers, for example, see opportunities at the lower end of the credit spectrum, where issuers particularly benefit from stronger growth.
 
We believe high yield will continue to deliver strong relative returns in a strengthening economy as it has during other periods of economic growth, helped in part by its higher coupons. The leveraged loan market looks particularly interesting at this time given its floating-rate characteristic and the associated lack of duration risk.
 
While somewhat out of favor in 2013, emerging markets debt remains a source of long-term value as EM credit quality improves. The question for investors is which type of EMD makes most sense.
 
Our search for returns is taking into account the upturn in growth expectations across developed markets and emerging markets. This shift is echoing through portfolios in ways that vary across asset classes. In all cases, we seek to generate returns and manage risks through fundamental, research-driven security selection—a process that is particularly effective at this point in the business cycle.
 

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