Coffee Break 06.05.2019

INVESTMENT CONVICTIONS

• Core scenario
  • We have a moderately constructive long-term view. The Global economy is growing and seems to have hit its trough last winter.
  • The political risk premium has decreased and central banks have become more dovish, stalling the normalisation of their monetary policy.
  • We take some comfort in the improving macro data in China, bottoming out in Europe and stabilising in the US.
  • In Emerging economies, the measures taken by the Chinese authorities to support the economy are starting to bear fruit and the GDP data just surprised on the upside.
  • In Europe, the latest economic indicators surprised on the upside. On average over 2019, GDP growth is expected to be at 1.3%.
• Market views
  • Equity fund flows remain negative in recent weeks despite positive performance of markets: investors are staying cautious while the Q1 2019 earnings season is ongoing.
  • The corporate sector remains a large buying source via buybacks, but the “black-out“ period during the Q1 earnings reporting stretch has started.
  • European and Japanese equity valuations are below their historical average, whereas US and Emerging markets are back to long-term averages.
  • Improving macro data in China and Europe would likely alleviate upward pressure on the USD, downward pressure on inflation expectations and lift global bond yields.
• Risks
  • Geopolitical issues are still part of unresolved current affairs. Their outcome could still tip the scales from an expected soft landing towards a hard landing.
  • International trade relations remain a source of uncertainty. They could further weigh on output growth and trigger spikes in volatility.
  • Persisting slowdown in Europe and Emerging markets in spite of easing measures.

RECENT ACTIONS IN THE ASSET ALLOCATION STRATEGY

We stay neutral equities as a whole. We have tactical tilts on regions though as we see more potential for a catch up in specific regions’ macroeconomic data and equity valuation. In our selection, we take into account dovish central banks, fading recession fears, low rates and low inflation but acknowledge the rally in risky assets since the start of the year. We favour Emerging markets equities over US equities and we favour euro zone equities over Europe ex-EMU. We stay neutral Japanese equities. 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 neutral equities
  • We are underweight US equities. We expect slower, but positive, earnings growth in 2019. Equity valuations have recovered and are now at fair value as stock prices rose and earnings expectations were revised downwards.
  • We are overweight Emerging markets equities. Chinese growth is the key driver: monetary support and fiscal easing should ensure a growth target above 6%. Trade conflict is not resolved but the peak in tariffs is likely behind us. The Fed’s pause is a tailwind for the region.
  • We are overweight euro zone equities. Macroeconomic figures are bottoming out and domestic demand remains decent. Most foreign investors have left the region, leading to a consensus underweight. Valuation remains cheap and below historical average despite the recent rebound.
  • 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 are neutral Japanese equities. Absence of conviction, as there is no catalyst. The region could catch up if the news flow around international relations improves and global growth renews with more traction.
• We are underweight bonds and keep a short duration
  • We expect rates and bond yields, especially German 10Y yields, to rise gradually from depressed levels.
  • 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 is accommodative and will add a new TLTRO.
  • Emerging market debt has an attractive carry and the pause in the Fed tightening represent a tailwind.
  • We diversify out of low-yielding government bonds, and our preference goes to US High yield, as a dovish Fed, low inflation and receding recession fears point towards the carry trade.