Coffee Break 04.03.2019

INVESTMENT CONVICTIONS

• Core scenario
  • In Emerging economies, activity continues to soften. Major central banks, including the Fed, the Bank of England and the European Central Bank, list international trade relations as a source of uncertainty. The measures taken by Chinese authorities to support the economy should result in a GDP growth of around 6% in 2019. Such measures will benefit the broader region. We note that the announced measures will imply more efforts in the future to put public debt on a sustainable path.
  • In the US, we expect a sustained growth, albeit at a slower pace (2.4% on average in 2019 vs. 3% in 2018). Meanwhile, the Fed will stay “patient” to ensure a soft landing.
  • In Europe, the economic cycle remains less dynamic (on average over 2019, GDP growth is expected to be at 1.4%). The current economic situation continue to disappoint but expectations for a turnaround are improving. Policy risks are manifold. Lower oil prices and looser fiscal policies should help the region steer clear from a recession.
• Market views
  • Investor risk appetite remain extremely low and has not yet recovered since the start of the year. As a result, investor positioning is light and allocation to cash is high. If consensus realises that the world economy is in a slowing, but growing economic environment, risk taking could increase throughout the year.
  • Participating in the rally at the start of the year was key. We remain slightly overweight equity and recognise that markets would need good news beyond central bank dovishness (political risks, growth stabilisation) to rise further. We would tactically wait for some retracement before further increasing our equity exposure. As investor positioning is light, it would however need unexpected bad news to trigger a sharp fall.
  • Opportunities lie in more central bank liquidity and dovishness, widespread pessimism and low positioning, stronger rebound of economic growth or political risks relief.
• Risks
  • Geopolitical uncertainties: They could tip the scales from an expected soft landing towards a hard landing.
  • Emerging markets slowdown: Any fiscal or monetary measures taken to mitigate the impact of the trade war helps in the short term and weighs in the longer term.
  • EU political risks: Political pitfalls could fuel euro scepticism further as opinions diverge on a growing number of issues, i.e. “Brexit”, Italian public finances and social unrest in France and with EU Parliament elections this May. For now, the trade war initiated by the US has only impacted the euro zone indirectly but the US DoC reports on the EU car industry's security threats are due.
  • Domestic US politics: A divided Congress, the forthcoming budget-related deadlines and slow global growth will weigh on US exports.

RECENT ACTIONS IN THE ASSET ALLOCATION STRATEGY

We are overweight equities via the US and Emerging markets. We remain tactically neutral euro zone equities. We are underweight Europe ex-EMU and neutral Japan. In the bond part, we keep a short duration and diversify out of low-yielding government bonds.

CROSS ASSET VIEWS AND PORTFOLIO POSITIONING

• We are overweight equities
  • We are overweight US equities. The US Fed is clearly supportive for the domestic economy. It removes the risk of monetary error in the next months and rates increase should remain contained.
  • We are tactically neutral euro zone equities. Macroeconomic figures are weakening but the labour market stays strong and that will help support consumption. Political uncertainties on Brexit are a drag.
  • We are underweight Europe ex-EMU equities. The region has a lower expected earnings growth and thus lower expected returns than the continent, justifying our negative stance.
  • We have neutral Japanese equities. Absence of conviction, as there is no catalyst.
  • We are overweight emerging markets equities. A more dovish Fed is good news for the region. We believe in its economic growth potential and while they have been badly hit in 2018 by US trade negotiations, they have been resilient.
• We are underweight bonds and keep a short duration
  • We expect rates and bond yields to rise gradually after the strong decline in recent weeks.
  • A slower but still expanding European economy could lead EMU yields higher over the medium term. There is an unfavourable carry on core and peripheral European bonds. The ECB appears accommodative and could add a new (T)LTRO, but has just ended its QE.
  • Emerging market spreads have tightened in the current, more optimistic, context. However, we would need new performance triggers for another spread tightening. Hence, we have decreased our exposure and took partial profit.