Outlook & Convictions n°3

Analysis - 7/6/2018

Edmond de Rothschild has released its third edition of House View

This publication presents Edmond de Rothschild’s key convictions for macroeconomics, asset allocation strategy, and the principal asset classes.


MACRO OUTLOOK

The US could be one of the few major economies to see growth accelerate further in 2018...

...but the struggle with China for global leadership will continue to weigh on the outlook...

...particularly in the eurozone where political instability has risen sharply and diverging levels of loan growth are reinforcing financial volatility.


ASSET ALLOCATION

(Geo)political risks strike back

- Allocation: focus on equities rather than bonds while remaining tactical

- Equities: adopt a thematic, rather than a purely geographical, approach

- Bonds: long rates are still too low while credit risk now offers slightly improved rewards

 


FIXED INCOME

The vice slackens a little on bond markets

- Falling bond markets have made valuations a little more attractive

- Volatility is still being driven by US economic policy shifts and monetary normalisation

- Local political risk is higher than normal but looks fairly well discounted to us

 


EQUITIES

Volatility is up, but talk of the end of the equity bull is premature

- Relatively benign macro conditions are still supportive for equities

- Corporates remain in good shape – we see limited signs of peak market CEO exhuberance

- However, peak cycle earnings growth is behind us and exogenous risks are significant

 


CURRENCIES

Understanding currency effects on portfolio construction

- There are three ways to manage currency exposure: systematic hedging, passive acceptance and active management. We prefer the third solution

- Both in terms of risk and performance, it is impossible to ignore a portfolio’s currency exposure

- Depending on the investment scenario, being exposed to a foreign currency like the US dollar, Japanese yen or Swiss franc can make portfolios more robust

 


INFLATION

Cross macro/market analysis. And what if inflation were to return?

- Inflation trends are increasingly determined by subjective investor perceptions, thereby accentuating volatility

- As a result, investors are moving away from traditional tools to hedge portfolios against a surge in inflation

- Active investment stratégies should help portfolios weather inflationary phases

 


IDEAS

Indices/Benchmarks/ETFS: a huge success or a worrying development?

- Indices and products which replicate index returns are booming

- So much so that market structures are changing

- Investment diversification is more than ever essential

 


 

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