Coffee Break 03.06.2019

INVESTMENT CONVICTIONS

• Core scenario
  • We have a moderately constructive long-term view but are aware of political pitfalls, in particular the re-ignited trade conflict which may last longer than initially thought.
  • The political risk premium has increased again but the global economy is growing and seems to have hit its trough last winter.
  • Central banks have become more dovish, leading to a sharp fall in bond yields.
  • In Emerging economies, the measures taken by Chinese authorities to support the economy will slowly show their impact.
  • In the euro zone, the economic cycle remains less dynamic: on average over 2019, GDP growth is expected to be at 1.3%.

• Market views
  • Equity fund flows remain negative in recent weeks: investors are staying cautious in the light of recent trade tensions.
  • The corporate sector remains a large buying source via buybacks.
  • European and Japanese equity valuations are below their historical average, whereas US and Emerging markets are back to long-term averages.
  • Stabilising or improving macro data would likely lift global bond yields whereas chilling business activity and the escalating trade conflict will jeopardize confidence in the recovery.

• Risks
  • The US – China trade conflict is at the top of the list. It could further weigh on output growth and trigger further spikes in volatility. We expect this to be a lasting issue, beyond trade.
  • Geopolitical issues (e.g. Iran) are still part of unresolved current affairs. Their outcome could still tip the scales from an expected soft landing towards a hard landing.
  • Political uncertainty in Europe (European institutions, “Brexit”, limited margin of manoeuvre).

RECENT ACTIONS IN THE ASSET ALLOCATION STRATEGY

We stay overall neutral equities with a regional tactical bias: overweight US equities vs underweight UK. We are neutral everywhere else. In the bond part, we keep a short duration and we continue to diversify out of low-yielding government bonds via exposures to credit and Emerging markets debt in hard currency.

CROSS ASSET VIEWS AND PORTFOLIO POSITIONING

• We are neutral equities
  • We are overweight US equities. We think there is still a Trump put in addition to a Fed put, which makes the region a safer choice.
  • We are neutral Emerging markets equities. The US Fed’s pause is a tailwind for the region but the trade war is a major hurdle. We still have a growth expectation above 6% for China this year.
  • We are neutral euro zone equities. We expect a rise in the equity market but are aware of the restraining factors such as the vulnerability of global trade. The labour market and domestic demand remain decent. Most foreign investors have left the region, leading to a consensus underweight in spite of cheap valuation.
  • 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 stay 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 dovish stance of the US Fed represents a tailwind. Trade uncertainty and idiosyncratic risks in Turkey and Argentina are headwinds.
  • 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.