Strategic Investment Group

Scenario Analysis 2005

December 2005

Last year’s base case scenario described a Moderate Expansion, forecast fairly normal capital market returns, and predicted that foreign equity would outperform the U.S. Although we missed on the magnitude, strong returns in emerging and developed markets did benefit our portfolios and were consistent with our Global Productivity scenario, in which stronger than expected profitability led to outsized returns from non-U.S. stocks. Returns were also boosted by strong capital flows to private equity and real estate. Our scenario analysis for 2006 presents five hypothetical situations. The base case scenario, titled Continued Expansion, assumes stable inflation and continuation of above-trend world growth. Foreign Growth assumes higher than expected economic growth in foreign economies without an uptick in inflation. The Fed-Induced Slowdown describes a negative shock produced by tighter monetary policy in response to increasing U.S. inflation. The two extreme scenarios (both unlikely) are discussed in our M&A Boom and a Global Recession sections of our 2005 Scenario Analysis.

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