Please see below the latest Investment update from Christopher Mahon, Director of Asset Allocation Research at Baring Asset Management. The update discusses investment outlook in the US, following the appointment of Janet Yellen's appointment to chair of the Federal Reserve on 9th October.

The race to succeed Ben Bernanke as chairman of the Federal Reserve came to an end on 9th October as Janet Yellen, the current vice-chair of the Federal Reserve's Board of Governors, was nominated as President Obama's choice.

It had been a two-horse race, with Larry Summers, a Harvard professor and former Treasury Secretary, having

been the favourite, but Ms Yellen's candidacy was assured when Mr Summers withdrew after criticism of his role in government during the late 1990s and early 2000s. Ms Yellen has a long history of service at the Federal Reserve.

With a background in academia, having co-authored a Nobel prize-winning paper, Ms Yellen served on the board of governors of the Federal Reserve in the mid-1990s, working alongside Alan Greenspan, and was then president of the San Francisco Federal Reserve from 2004-2010. Since 2010 she has served as vice-chair of the Federal Reserve.

Yellen's nomination (which must be approved by Congress) came as something of a relief for financial markets, her competitor having been viewed as more likely to press for a reduction in stimulus, whereas she is deemed to incline towards maintaining stimulus at current levels. At this point in the recovery, Yellen is believed to view boosting employment as the more important part of the Federal Reserve's dual mandate, prioritising this over fighting inflation.

Janet Yellen (PD)However, it would be unwise to characterise her as having a fixed view on monetary policy. During her tenure at the Federal Reserve in the mid-1990s, she pressed then-chairman Alan Greenspan to raise interest rates, to prevent the economy from overheating. On this occasion her advice was ignored, but it serves to illustrate that Ms Yellen does not have only one policy outlook.

Although the Federal Reserve left policy unchanged at its September meeting, there is still a fear that it may look to scale back stimulus measures in the course of its next meetings. In our view, Ms Yellen's nomination arguably reduces this likelihood. The US government averted a default in mid-October with a last-minute deal, but there

may be a repeat of October's stand-off in January and February 2014, when the borrowing limit approaches once again.

Overall, we believe that the view to take on Federal Reserve policy in the early part of 2014, when Ms Yellen is expected to take up her post, is that any changes to the current monetary policy stance will be delayed. The perception of Ms Yellen as a proponent of the current policy of quantitative easing, combined with the possibility of additional fiscal tightening and the impact on growth of the repeated dramas in Washington, mean that the current stance will remain unchanged, in our opinion.

From an asset allocation perspective, we now think that bonds are more attractive than in August and September, when the expectation of a change in policy caused yields to rise. With forecasts for a reduction in the level of asset purchases now shifted back to later in 2014, bond prices may resume their upward trajectory.

The uncertainty over Federal Reserve policy caused the equity rally in the first half of 2013 to come to a halt, and continued debate over when a change in policy may occur may, in our view, curb returns on equities in a similar fashion until more clarity is available on when the Yellen-led Federal Reserve may change policy.

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