Multi-asset investments views – November 2019 Is this as good as it gets?

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Our views

Three positive developments are releasing some pressures on markets near term.

First, the US has reached a ‘Phase 1 deal’ with China, with an agreement in principle on agricultural goods purchases, intellectual property, FX transparency and financial services opening. This agreement warranted a suspension of the tariffs increase scheduled October 15th. However the Dec 15th tariff increase is still contingent on being able to put the agreement onto paper, with the aim to be signed at the APEC summit on 14-17 November. Our economists estimate that with Friday’s news, the US may have thus “saved themselves” an additional cost of a bit less of 0.2% of GDP. A true resolution of the “trade war” would in our view entail a dismantlement of the tariff hikes already implemented, and we are still far from this. In the meantime, trade policy uncertainty has been affecting the global economy and could continue to have an impact on investment. However, US hard data on production and orders was resilient recently and seems to have decoupled from more depressed business surveys. In this context, the trade truce could limit further downside. In this context, we have reinforced our cyclical tilt in our equity exposure as the relative valuations of cyclicals remain depressed.

Second, on the Brexit front, while the chance of an agreement looked bleak early October, Prime Minister (PM) Johnson managed to reach a deal with the European Union (EU). Saturday’s October 19th parliamentary session did not provide a conclusive vote on this deal. However, in the meantime, PM Johnson has (reluctantly) requested an extension to the Brexit deadline of October 31st and the EU is likely to grant such an extension. Therefore, the chances of a “no deal” exit are now materially lower, which should help business and market sentiment.

Third, the Fed announced a new 60bn USD per month liquidity injection through bill purchases. This is the first time this year that the Fed has acted decisively. They are trying hard not to call it QE but it will be seen by market as a liquidity boost nonetheless. With front end rates lower and term yields higher (driven also by trade deal optimism), the curve has re-steepened and back into positive territory which is a good sign (cf. chart below). In this context, we think that inflation expectations in the US are much too low and have added new positions on US inflation breakeven in our portfolios.

The US yield curve is back in positive territory

Our key convictions :

  • We have increased our cyclical tilt in our equity exposure as market pessimism on growth is still extreme. We remain prudent on US equities as prices are close to all-time highs while the underlying macro momentum is weakening.
  • Although we reduced exposure, we remain positive on Euro High Yield and Emerging Market debt as a dovish Fed is supportive of carry positions
  • We remain constructive on Eurozone and US inflation breakevens as market pricing remains too pessimistic

Our positionning :

  • Cyclical tilt in our equity exposure
  • Underweight US equities
  • Positive EM debt and Euro High Yield
  • Positive US and Eurozone inflation breakeven
  • Long equity call options delta hedged to protect the portfolios where possible

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