Unravelling the Puzzle Challenges for Global Asset Allocation

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The eurozone debt crisis is here to stay. Only stronger long-term actions, such as strengthening the single market, can provide relief. Systemic risk for Western economies may also come from the commodities markets (in particular, oil prices) and the US budgetary position. A good corporate governance system must be capable of dealing with bad news in a transparent manner and channelling this information into prices. Creating the right incentives is a complex exercise that entails actions at different levels. It is difficult to induce shareholders to become engaged and may need to be supported by further regulatory actions. Asset allocation theories need an overhaul. Volatility is only a measure of risk and not a suitable tool with which to forecast risk. Returns are mainly driven by events that we cannot model with traditional allocation theories (they are not normally distributed). How can we better equip ourselves to face liquidity risks? The structure of capital markets has undergone sweeping changes thanks in part to the liberalisation process started by MiFID. The benefits of a more competitive environment must now be passed on to final users, such as retail investors. More should be done to ensure that competition delivers on its promises, e.g. by reinforcing intellectual property rights and discouraging anti-competitive market practices.