Central banks are committed to reassuring investors

Asset allocation strategy - 8/2/2019

The Fed and the ECB have managed to firmly establish lower interest rates while pushing risk assets higher. Investors are sceptical amid high political and economic uncertainty but, at least for the time being, the central bank actions have helped distract markets from the mixed fundamental picture.

Even so, we remain rather cautious overall due to the following risks.

  •  markets are already expecting a lot from central banks, close to a 100bps cut from the Fed. And yet, even an ardent defender of a laxer approach to the monetary policy like FOMC’s member James Bullard has only been suggesting a moderate and precautionary cut
  • political risk and protectionist issues have every chance of lasting at least up to the next US presidential elections, leading companies to adopt a wait-and-see attitude and investment to fall. We note also that the risk of a hard Brexit is on the rise. In addition, we cannot rule out fresh elections in Italy after the summer, with the risk that a coalition of the hard right (the Lega headed by Matteo Salvini and Fratelli d’Italia led by Giorgia Meloni) might come to power on an anti-euro ticket.

We will also be looking at second quarter results to analyse corporate margin trends. The big question is whether we are on the cusp of a downward trend. If so, along with the US yield curve inversion, it would mean that the end of the cycle is approaching.

Key points
  • Markets are already discounting interest rate cuts
  • We remain cautiously invested
  • We are underweight on Japan equities and favor thematic equities instead

 

That being said, central banks are firmly committed to underpinning activity to reassure investors so we see no reason to change our asset allocation, apart from some marginal adjustments. We have, for example, reduced Japanese equities exposure and upped thematic investment plays like (e.g. the Big Data) instead. Earnings revision momentum has evaporated in Japan and, more importantly, the Bank of Japan seems incapable, or even unwilling, to follow the Fed and the ECB in moving towards fresh easing.

    Our convictions for August Changes compared to the previous month
EQUITIES
US
Europe
  Euro
  United Kingdom
Japan
Emerging countries
Thematics
Fixed income
US
Euro
Investment Grade
High Yield
Emerging markets
DIVERSIFICATION    
Convertible bonds
Dollar
Money market

 

Next headkine events
  • Next ECB meeting: September 12
  • Next FED meeting: July 31
  • Brexit date?: October 31

 

Elément complémentaire