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Integrated Portfolio Solutions
Alternative Investment
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SCENARIO ANALYSIS December 2004 Market returns for 2004 most closely resembled the base case scenario we labeled Traditional Recovery in last year’s analysis. Global economic growth strengthened from 3% in 2003 to an estimated 4% in 2004, inflation was low and stable, profit growth remained strong, and global monetary policy was easy. Risky assets outperformed once again, causing overweight positions in emerging markets, small capitalization stocks, and high yield bonds to move our portfolio returns above policy and peers. In our scenario analysis for 2005, we present five scenarios. The base case scenario, titled Moderate Expansion, assumes a continued recovery with stable inflation. Global Productivity assumes continued high levels of productivity and profitability without an uptick in inflation. A negative version of this, labeled Stagflation, describes a negative inflationary shock scenario. The two extreme scenarios (both unlikely, in our view) explore the euphoria of an M&A Boom and the dislocation caused by a Global Recession. |
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