Risky assets and yields are under the pressure of increasing geopolitical tensions, i.e. the latest development between the United States and China. In state-controlled press, one can read that even though China has tried to avoid a trade war, once it breaks out, appeasement would not be an option.
And what could bring broader negative side effects than the announced US steel and aluminium tariffs? Recent rhetoric and changes made in the US administration, notably the Secretary of State and the Director of the National Economic Council. This all point to a more aggressive stance against China. The trade statistics reveal that 43% of the US goods deficit is with China, 44% is in tech products and 27% is in tech products with China. As the FOMC convenes under its new Chair, Jerome Powell, a hike in the Fed funds rate this Wednesday is already priced-in by markets. Protectionist measures would likely push 2018 and 2019 median dots higher.
We continue to see a less favourable risk-reward and look for an entry point to increase risk exposure.
Our current investment strategy on traditional funds:
grey : no change
blue : change
EQUITIES VERSUS BONDS
We continue to see an underlying favourable background and look for an entry point to increase risk exposure.
- Global growth momentum outside the US is likely to have peaked.
- Global monetary tightening is progressive, but the US are tightening first:
- The Federal Reserve started its balance sheet reduction in October, hiked in December and should continue its hiking cycle in March.
- The ECB has recalibrated its programme, buying less bonds as of January. A rate hike should not occur before 2019.
- Geopolitical risks remain an obstacle.
REGIONAL EQUITY STRATEGY
- We have reduced our euro zone equity exposure to neutral. Recent data show the first signals of a lower cyclical growth. The economic expansion in the region remains solid, but markets expectations have increased, and this is more likely to lead to disappointments.
- We have kept a neutral –tactical- stance on emerging markets equities.
- We have become negative on UK equities. There is less than one year to set up new trade relations in the “Brexit” negotiations and little progress has been made since the start of the year. A hawkish Bank of England monetary policy stance has put a barrier to GBP depreciation, challenging overseas profit growth.
- We remain neutral on US equities. The US policy mix is evolving as fiscal policy becomes more accommodative and monetary policy more restrictive. We note that economic activity has further accelerated at the turn of the year implying that the growth/inflation mix is not deteriorating yet.
- We are positive on Japanese equities. The Bank of Japan confirmed its dovish stance and should not join other central banks in tightening its monetary policy anytime soon but this has yet fails to weaken the JPY. The visibility on the accommodative policy mix and an above-potential expansion is good news.
- We reduced our duration by a further 0.25Y
- We are negative on bonds and keep a low duration.
- With a tightening Fed and expected upcoming inflation pressures, we expect rates and bond yields to continue their uptrend towards 3% on the 10Y US government debt.
- We continue to diversify out of low-yielding government bonds:
- We have a neutral view on credit, as spreads have already tightened significantly and a potential increase in bond yields could hurt performance.
- We have a diversification in inflation-linked bonds.
- We keep our positive stance on emerging market debt, as the on-going monetary easing represents an important support.
- We are neutral on high yield.