Signs of a slowdown in global economic growth led us to reduce our overall risk exposure to neutral in June. While the level of global growth remains above trend, we are struck by the breadth of the decline across regions, particularly in the United States and China. In the United States, both business and consumer surveys indicate lower activity ahead while, in China, tighter policy is slowing credit growth.

Outside of the growth slowdown, other factors are more supportive of risk taking. Market volatility is very low, with both implied and realised volatility near post-2008 lows. Momentum is also strongly positive for developed market equities outside of the United States and across emerging market equities, bonds and currencies.

Within equities, we have reduced our position in emerging market equities to a small overweight, given the category’s strong performance over the past year. We remain overweight Europe and underweight the United States. Overall, we are now modestly underweight equities, with our exposure to credit bringing us to a neutral stance overall.

Among income assets, we are overweight in emerging market local debt, given attractive real yields, stable inflation and cheap currency valuations in many higher yield markets. We have also maintained our positions in loans and event-linked bonds.

In currencies, we are long exposure to high-yield emerging market currencies versus low-yield developed currencies, and are near neutral in the U.S. dollar.

Finally, among defensive assets, our overall duration exposure is neutral, with a preference for U.S. Treasuries over both European and Japanese bonds—the mirror image of our equity exposure.

In summary, we have reduced total risk from overweight to neutral in line with the deceleration in growth. Instead, we prefer relative value positions, where we see attractive opportunities among risk assets in Europe and emerging markets. We will continue to monitor the environment and look forward to sharing our views with you again next month.