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Political and monetary risks are complicating the situation

Asset allocation strategy - 8/8/2018

The second quarter earnings season is now well under and has so far confirmed that the US economy is enjoying strong momentum, and to a lesser extent so is the rest of the world. Some landmark stocks like Facebook have been volatile but results have generally reassured investors.

Risk assets have risen on strong fundamentals

Donald Trump’s stimulus plan is boosting US growth while Europe and Japan have seen their economies slow a little more than expected. Meanwhile, China is increasing (mostly monetary easing) measures to ward off any risk of its economy decelerating at a faster pace. Global growth is overall trending higher and risk assets rose in July on strong fundamentals with both equity and bond markets ending the month higher. 

Even so, markets are still facing the same risks:

  • protectionism with escalating threats in the US-China stand-off. Interestingly, the tension between the US and Europe has waned.
  • worries that market liquidity might dry up, especially that provided by central banks. The Fed is determined to continue shrinking its balance sheet, the ECB has confirmed its monetary shift and the Bank of Japan is promising to be more flexible with its accommodating stance. In recent years, financial assets have largely benefited from abundant central bank liquidity. It is tricky to assess what impact reduced liquidity will have on markets, but it makes sense for investors to tread carefully.
Key points
  • Moderate equity overweight
  • US equity exposure upped

This leaves us in the same position: the environment is fundamentally sound and suggests we should be overweight equities, but only moderately so given the sort of risks we are facing today. This month we have chosen to divide this overweight between the eurozone and the US so as to take account of

  1. the growth differential between the US and Europe, a trend which looks as if it could last and
  2. the fact that actual protectionism would have a bigger impact on Europe’s companies which are the platforms of the global economy.

    Our convictions for August Changes compared to the previous month
EQUITIES
US  
Europe
 
  Euro
  United-Kingdom
Japan
Emerging countries
FIXED INCOME
US
Euro
Investment Grade
High Yield
Money market
DIVERSIFICATION    
Convertibles bonds
Dollar
Next headline events
  • September 18 & 13: next ECB meeting
  • September 18 & 19: next BoJ meeting
  • September 25 & 26: next Fed meeting

Elément complémentaire