Coffee Break 12/9/2019

LAST WEEK IN A NUTSHELL

  • Global composite PMIs came out better than expected. In particular, the manufacturing sector, at 50.3 points, is expanding again for the first time since April.
  • The US labour market remains robust, which is good news for the holiday spending season. Weekly initial jobless claims declined to 203k, the best level seen in the past 50 years!
  • OPEC members gathered in Vienna and agreed toward deeper oil production cuts, in order to support oil prices. Meanwhile, Saudi firm Aramco has become the world’s biggest IPO.
  • Japan announced a fiscal package. The total is perhaps bigger than expected but the fresh fiscal measures are not, leading to ca. 1% of GDP net new stimulus over 2-3 years.
  • In Germany, Norbert Walter-Borjans and Saskia Esken were elected to steer the junior coalition partner SPD through the rest of the legislature until 2021, or to put an end to the “grand” coalition after 2 years.

 

WHAT’S NEXT?

  • A pivotal week for markets with notable monetary policy decisions and economic projections from the Fed and the ECB.
  • UK citizens are going to the polls for general elections. PM Boris Johnson’s Tories are expected to gather a majority, opening the way to an orderly Brexit by January 31st 2020.
  • We will learn if importing Chinese consumer goods into the US will become more expensive or if a Phase One agreement will be found.
  • The UN climate change conference will conclude while European leaders will gather for their last summit in 2019 and discuss the roadmap of the new Commission for the next years.

INVESTMENT CONVICTIONS

  • Core scenario
    • Our medium-term scenario remains slightly constructive as we expect a bottoming out of the economy. With markets creeping up further, we again took some profit on our equity allocation. We keep an overweight equities vs bonds.
    • The main uncertainties for financial markets remain the trade conflict and the bottoming in manufacturing. Rolling back existing tariffs would clearly be good news for global trade perspectives.
    • Central banks have reached massive accommodation policies. In the US, the Fed started buying Treasury bills to add liquidity into the system. The accommodative stance is becoming a medium-term tailwind for the global growth/inflation mix.
    • In Emerging economies, Chinese authorities are mitigating the impact of the trade war and slowing global growth by using currency, monetary and fiscal tools, avoiding excessive measures like in 2015.
  • Market views
    • Decrease of political risks: increasing probability of trade deal between the US and China, low risk of a hard Brexit, increasing talk of a EU Banking union.
    • There is a possibility of an extension of the year-end rally on the basis of a kind of “bullish” capitulation rally on improving hopes.
    • On the other hand, fundamentals will not suddenly become better and political execution risks have not disappeared as neither a Brexit deal nor a Phase 1 trade deal are signed yet.
    • The relative equity valuation vs. bonds remains attractive.
  • Risks
    • The US-China trade conflict. The United States and China are working on drafting an agreement, but China doubts if a long-term trade deal is possible with President Trump.
    • Domestic political issues in the US (e.g. formal impeachment process and election run-up) are likely to dominate. These could trigger growth shocks and attractive entry points.
    • Geopolitical issues (e.g. Iran, Hong Kong, Chile) are still part of unresolved current affairs. Their outcome could still tip the scales from a soft landing towards a hard landing.

 

RECENT ACTIONS IN THE ASSET ALLOCATION STRATEGY

Our positioning is slightly overweight. We favour European (Euro zone over the UK) and US equities. We are neutral Emerging Markets and Japanese equities. We remain cautious about exposure to government rates in developed countries. We diversify out of low-yielding government bonds via exposure to credit and Emerging markets debt. In terms of currencies, we keep a long JPY and an exposure to gold as hedges.

 

CROSS ASSET STRATEGY

  • We are slightly overweight equities
    • We are still overweight US equities. Equities did perform well since our entry points during the summer in spite of the economic slowdown. The region remains a relatively safe choice. Valuation are higher than in other region but the risk premium seems adequate for now.
    • We are neutral Emerging markets equities. The region has underperformed year-to-date and could offer some upside. A dovish US Fed is a tailwind as the USD weakens somewhat.
    • We have taken profit on euro zone equities. We took profit and our positioning is now neutral. The latest macro data show signs of resilience and a bottoming out in the economy. A window of opportunity on fiscal accommodation is staying open with more ECB visibility.
    • We are slightly underweight Europe ex-EMU equities and neutral UK.. We approach a resolution of Brexit but political noise ahead of the December election obscures the plausible outcomes. Valuation is attractive and positioning is low. Many non-European investors have shun Europe so far but could look twice as the balance of risks improves.
    • We stay neutral Japanese equities. Absence of conviction, as a catalyst is missing. It has to be seen if household consumption can resist the increase of the VAT rate from 8 to 10% that took place early-October.
  • We are underweight bonds, keeping a short duration and diversify out of government bonds.
    • We expect rates and bond yields, to creep up very gradually but stay low.
    • Christine Lagarde has begun her tenure as President of the European Central Bank. She faces two major challenges: healing the rift between the policy makers of the governing council and national governments still being reluctant to take over the baton with fiscal stimulus policies.
    • We diversify out of low-yielding government bonds, and our preference goes to Emerging debt and EUR-issued corporate bonds.
    • Emerging market debt has an attractive carry and the dovish stance of the Fed represents a tailwind. Trade uncertainty and idiosyncratic risks in Turkey and Argentina are headwinds.
    • We also have an exposure to gold in order to increase the portfolio hedging.