Debate now focused on sustainability of economic recovery

As we head to the end of the year and speculation surrounding the withdrawal of monetary stimulus by the central banks mounts, the debate is focused on how sustainable the recovery will be. More so, what ‘shape' will it take? Will it be L, U, V or W?

We believe the L and U shapes can be discounted but the difficult call is as to whether it will be a V, with strong growth generating further improvement, or W with the recovery petering out, as the stimulus is withdrawn. There are three economic scenarios, each with quite different asset allocation implications. The first, and most likely, is what we call the ‘muddle through’. This is a situation where growth stumbles on but at a lower rate than the long-term trend. In this environment, quantitative easing is slowly reduced but remains in place for some time, while inflation is event...