Coffee Break 16.12.2019

INVESTMENT CONVICTIONS

• Core scenario
  • Our 2020 scenario is slightly constructive as we expect a bottoming out of the economy but also lower global expected returns than in 2019. Rolling back existing tariffs would clearly be good news for global trade perspectives.
  • One of next year’s market drivers will be the US elections on 3 November. The trade uncertainty is transitioning to election uncertainty.
  • Central banks have reached massive accommodation policies. In the US, the Fed is buying Treasury bills to add liquidity into the system. The accommodative stance is a medium-term tailwind for the global growth/inflation mix and upcoming data should reflect this.
  • 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
  • Significant fall in political risks: increasing probability of trade deal between the US and China, remote risk of a hard Brexit, increasing talk of a EU Banking union and ambitious Climate roadmap.
  • Cyclical and value stocks are benefitting from the extension of the year-end rally on the basis of a kind of “bullish” capitulation on improving hopes.
  • The relative equity valuation vs. bonds remains attractive.

• Risks
  • The US-China trade conflict. 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

Having taken profit during this pivotal week for financial markets, our positioning has become neutral equities. Many uncertainties are cleared up, e.g. the likelihood of a global recession, a hard Brexit, a full-blown trade war, Fed and ECB monetary policy forward guidance. We are slightly overweight euro zone and have a neutral positioning into year-end on all the other major regions: US, Emerging markets, Europe ex-EMU and Japan. We stay 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. As the USD is more likely to slowly depreciate, we started to underweight the currency.

CROSS ASSET STRATEGY

• We are neutral equities
  • We have become neutral US equities. Equities did perform well since our entry points during the summer but valuation is demanding relative to other regions and its historical average.
  • We are neutral Emerging markets equities. The region has underperformed in 2019 and could offer some upside in the medium term. A dovish US Fed is a tailwind as the USD weakens somewhat.
  • We are overweight euro zone equities. The latest macro data show signs of bottoming out in the economy. A window of opportunity on fiscal accommodation is open with longer ECB visibility.
  • We are neutral UK. With the election of Boris Johnson as Prime Minister, a resolution of Brexit is within weeks. Investors’ positioning is low. Valuation and the competitive advantage of a weak currency make the country attractive.
  • We stay neutral Japanese equities. Absence of conviction, in spite of Prime minister Shinzo Abe’s fiscal stimulus package announcement.

• 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.