Economic and Market Commentary

Highlights:

• We have cut our Japanese growth forecast from 1.5% to 0.9%, reflecting short-term plant closures and supply chain interruptions
• We have increased our inflation estimates to 0% for Japan and 3.25% for the UK
• We remain overweight equities versus bonds
• Within fixed income, we continue to favour higher-yielding areas
• We have moved overweight from neutral for Europe, UK and Japanese equities.

Risk assets have absorbed an awful lot of bad news over the past month and their resilience can be ascribed partly to the attractive valuations that have long underpinned our positive view. A number of factors have changed since last month's meetings, but arguably the most significant for economies and markets are the geopolitical premium in the oil price and the impact of the Japanese earthquake on short- and long-term activity. We spent some time considering the implications of these changes for our economic forecasts and ultimately made few changes to our 2011 numbers. Indeed, the only adjustments were to cut our Japanese growth forecast from 1.5% to 0.9%, reflecting short-term plant closures and supply chain interruptions, and to increase our inflation estimates to 0% for Japan and 3.25% for the UK.

We have also pencilled in some forecasts for 2012 and, in most cases, we anticipate similar levels of growth and inflation next year to this, with interest rates only modestly higher as Western central banks seek to balance inflationary pressures with fragile growth. Japan is the exception, as here we expect the short-term disruption to production over the next few months to be made up in 2012. With reconstruction efforts also likely to support activity, we are forecasting 2.5-3.0% growth in Japan next year.