The outlook for macro policy and for the geopolitical Sovereigns face a continuing ‘return gap’ environment remains uncertain These dynamics suggest a continuation of the Our fifth annual cycle of interviews took place ‘lower rates, lower return’ environment over at between January and March 2017. In speaking with least the next 24 months. While the lower return leading sovereign investors and central banks (with environment has been a consistent theme in past assets in excess of US$12 trillion) we identified a years, in 2017 the implications are compounded, number of critical themes that shaped interview with low interest rates the factor of greatest responses. Unsurprisingly, we noted that the outlook — importance to both strategic and tactical asset for macro policy and the potential for further allocations in figure 2. Risk asset valuations have geopolitical shocks dominated discussions. inflated over a number of years, while the near- - Sovereigns see the end of QE (Quantitative uniform tilt to alternatives such as infrastructure Easing) without a clear indication as to the form or has resulted in supply challenges and delays. timeframe for further QT (Quantitative Tightening). In 2016, all sovereign profiles displayed a While the US has begun to raise interest rates, the return gap (figure 3), driven by the low interest rate Federal Reserve is engaged in parallel measures environment, however this shortfall was greatest that may reduce the quantum and pace of further among investment sovereigns. Traditionally, liability increases; and there is uncertainty whether and sovereigns have hedged fixed income against when other major markets will follow suit inflation (due to the focus on matching outflows - The bifurcation of the US and other developed to beneficiaries), while investment sovereigns have markets (notably the UK, Germany and Japan) left their inflation exposure open. This has led to had significant implications for currency rates, investment s