Investment Perspectives 2019 | Mid-Year Review & Outlook

Executive Summary

In this mid-year publication, we review our January expectations and analyse some current key economic indicators before outlining the asset allocation that we recommend for the second half of the year.

Our equity exposure has been reduced since the beginning of the year

Our assumption that markets were overpricing risks of a recession during the December correction led us to start the year being overweight equities, as we had not cut our equity allocation despite the high level of market stress. This proved to be rewarding as the strong rebound observed in the first four months of 2019 contributed to the strong performance of the portfolios, especially with bond markets also rallying.

We took advantage of the strong rise of equity markets to reduce our equity allocation significantly from overweight to underweight, reflecting our cautious outlook in view of the rising level of uncertainty. Whilst we had not expected government bond yields to climb much, the year-to-date collapse of yields has been a big surprise and a major contributor to the strong returns of fixed- income exposures

U.S. policies are a source of increasing uncertainty for markets

The high level of market stress observed at the end of 2018 was quickly replaced by a four-month period of declining volatility where markets proved to be relatively immune to negative headlines. This changed significantly in May when the optimism over a trade deal between the U.S. and China gave way to concerns over a major breakdown of trade talks following a series of “tweets” by Donald Trump. This was compounded by restrictions placed on business between U.S. companies and the Chinese tech giant Huawei and tariff threats on imports from Mexico. This list of destabilising market factors is far from exhaustive but their common point is that they all originate from the White House which has been flexing its muscles to achieve some of its objectives. With the launch of the U.S. presidential election campaign, this is likely to continue to represent a source of uncertainty and of volatility for the markets.

Markets have been boosted by the end of monetary policy normalisation

The 180-degree turn of the Federal Reserve, in announcing a pause of its cycle of rate hikes and the
end of its balance sheet reduction, has been one of the key drivers of the bond and equity markets this year. Under the end-2018 pressure from the markets, the Fed abandoned its pre-set path of one rate hike per quarter and announced that the shrinking of its balance sheet would formally end in September, much earlier than planned. At its June 18-19 meeting, the Fed turned even more dovish and opened the door for a rate cut as early as July. The European Central Bank President Mario Draghi has also been trying to reassure market participants about the bank’s ability to act amid growing doubts on the real effect of monetary policy in case of a recession. Another key driver of the markets’ rally has been the huge provision of liquidity by the People’s Bank of China (PBOC), equivalent to 60% of the creation of credit over a 12-month rolling period.

We have a cautious positioning ahead of the second half

At the onset of the second half we have modest underweight allocations towards debt instruments and equities and an overweight cash position. We feel that markets are on a sugar high as a result of increasingly dovish central banks. They also appear to be consciously ignoring a number of risks including, but not limited to, disappointing corporate outlooks, weaker economic trends, delayed central banks’ actions and a deterioration of the relationship between the U.S. and the rest of the world. At the risk of missing some short term upside we prefer to focus on the management of risk, especially when considering the appreciable year-to-date portfolio returns.

In the next section of the document, we will evaluate the macro environment and the prevailing financial conditions by highlighting several key indicators that we observe. Following a brief overview of the first half returns of the different asset classes, we will outline our current market outlook and asset allocation.

Table 0f contents

  • EXECUTIVE SUMMARY
  • THE MACRO ENVIRONMENT
  • FINANCIAL CONDITIONS
  • FINANCIAL MARKETS
  • MARKETS’ OUTLOOK
  • ASSET ALLOCATION 2nd HALF 2019

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Investment Perspectives 2019

Executive Summary

Global financial markets were affected badly by the geopolitical landscape

In the wake of the unusually smooth financial markets observed in 2017, the past year has been a quite dramatic wake-up call for investors. Early-year euphoria in equity markets gave way to rising anxiety, due not only to economic and political issues, but also to extreme market behaviour.

If the U.S. economy was by far the brightest spot, reflected by outstanding corporate profits, a deceleration of growth was observed across other regions, in China and Europe in particular. This weaker economic trend was compounded by the escalating impact of the trade war led by Donald Trump on the rest of the world, with China being his main target. Financial markets were also affected by a number of political uncertainties which proved to be more detrimental than was the case during the previous years; the resolution of some of these issues are among the key factors for an improvement of the fragile sentiment currently prevailing in the markets.

Model-driven trading brings chaos to the equity markets

The behaviour of equity markets towards the end of
the year has been very extreme and difficult to justify; the overwhelming proportion of computerized trading, which has grown over time to around 85% of trading volume, goes a long way to explain the violent intra- day swings and daily returns, especially in a context of lower liquidity. Machine trading didn’t cause problems during the bull market, but models have triggered indiscriminate selling more recently on the back of weaker economic signals and market momentum. While it is impossible to predict when markets will have regained their composure, economic fundamentals and corporate profitability should drive market performance over the long term and not these short-term trading models.

Negative returns have been observed across most asset classes

The drop of global equity markets was the main culprit for the disappointing performance in 2018, but this headwind was compounded by the overwhelming number of asset classes with negative yearly returns. Even truly diversified portfolios failed to offer the usual levels of protection that could have been expected in such market conditions.

According to research produced by Deutsche Bank at the end of October, 89% of assets were in negative territory, in dollar terms. That was the highest percentage on record based on data going back to 1901. Even if this number decreased somewhat during the last months, it still reflects a situation where the vast majority of global assets’ valuations were supported by extreme monetary policies.

Equities still offer the best value

We do not share the current pessimism observed in financial markets and our allocation into equities remains slightly overweight. We do not dispute the fact that economic growth has peaked, but global growth should remain solid and we do not anticipate a recession in the coming year. Valuations of equities appear low considering the outlook for earnings, bearish sentiment is excessive and the turmoil within equity markets should prove to be temporary. Economic fundamentals and corporate earnings drive equity performance over time and there now appears to be a dichotomy between what the markets are anticipating and what economic data and corporate earnings are indicating.

Table 0f contents

  • EXECUTIVE SUMMARY
  • 2018: REVIEW OF OUR INVESTMENT THEMES
  • 2018: ECONOMIC & POLITICAL DEVELOPMENT
  • 2018: THE FINANCIAL MARKETS
  • 2019 : ECONOMIC OUTLOOK
  • 2019: FINANCIAL MARKETS’ OUTLOOK
  • 2019: ASSET ALLOCATION

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Investment Perspectives 2018 | Mid-Year Review & Outlook

Executive Summary

In this mid-year publication, we review our January expectations and analyse some current key economic indicators before outlining the asset allocation that we recommend for the second half of the year.

 

Our early-year portfolio positioning was cautious

Our portfolio positioning at the beginning of 2018 was somewhat cautious, with an above-average level of cash and a modest overweight exposure to the equity asset class. We contended that 2018 would be a more challenging year for equities and this has greatly proven to be the case. Our expectation that bond yields would gradually rise has been vindicated in the case of U.S. Treasuries, but not for core European bonds.

We refrained from deploying any cash towards equities during the spectacular January rally as we felt that markets had become overbought and investors too bullish. With traditional assets struggling to produce positive returns in the current unstable market conditions, the role of alternative strategies has taken on more importance, as a source of uncorrelated performance and to strengthen the resilience of portfolios.

 

Global growth has levelled off, in Europe in particular

Global growth has eased during the first half but still remains solid. The widely expected extension of the broad and strong global economic trends observed throughout 2017 has not quite materialized as manufacturing and trade growth have shown some signs of moderation. A slowdown of economic growth has taken place in Europe, in Japan and even in the United States. The combination of financial market stress, escalating trade tensions and political issues has dented elevated levels of optimism and clouded the economic outlook. Compared to 2017, the radical agenda of Donald Trump is proving to be increasingly disruptive. Looking ahead, the U.S. economy is picking up steam thanks to a strong job market, robust consumer spending and the help of tax reform. In contrast, the Eurozone will be hoping for an improvement on its first half performance; a weaker euro should provide some help for exports, especially if the global trade dispute were to be resolved quickly in a positive manner.

The ECB remains cautious

The confidence of the Federal Reserve in outlining its monetary policy contrasts with the ever cautious communication of the European Central Bank. The Fed has already raised its benchmark interest rate twice this year and has indicated it should hike rates again during both of the remaining quarters. The central bank has also started to shrink the size of its balance sheet by some $ 150 billion to around $ 4.3 trillion. As expected, the European Central Bank announced that it will be ending its asset purchase programme completely at the end of the year. However, the news that interest rates would stay unchanged at least through next summer came as a shock and weakened the euro significantly. In a context of softer economic activity in Europe and the threat of a global trade war, the ECB clearly appears to be talking down the euro as a mean of offering support to the region’s economy.

We have a modest overweight allocation in equities

The current environment of sustainable growth and the positive outlook for earnings remain supportive for equities despite the headwinds represented by higher bond yields and concerns over tariffs on goods. We continue to hold
an overweight exposure in equities with a well-diversified regional exposure. We also believe that the portfolios need to have diversification due to the challenging and ever-changing market conditions. The time when all assets were lifted by the provision of abundant liquidity and ultra-low interest rates is behind us and markets have become more discerning. That is why we have added exposures to alternative strategies in order to further spread portfolio risk and to be able to rely on a wider range of performance sources.

In the next section of the document, we will evaluate the macro environment and the prevailing financial conditions by highlighting several key indicators that we observe. Following a brief overview of the first half returns of the different asset classes, we will outline our current market outlook and asset allocation.

 

Table 0f contents

  • EXECUTIVE SUMMARY
  • THE MACRO ENVIRONMENT
  • FINANCIAL CONDITIONS
  • FINANCIAL MARKETS
  • MARKETS’ OUTLOOK
  • ASSET ALLOCATION 2nd HALF 2018

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Investment Perspectives 2018

Executive Summary

2017 was a good year for the global economy and an outstanding one for equity markets

The global economy enjoyed its strongest rate of growth since 2011 with the most noteworthy aspect being that growth was broad-based and expectations were upgraded during the year. Geopolitical tensions,
at times quite threatening, failed to dampen high levels of business and consumer confidence and had only a short-lived impact on capital markets. Concerns about European political events did not materialize as populist parties failed to create an upset in several general elections. Also, Emmanuel Macron’s spectacular rise to power in France was considered to be a major boost for the future stability of the European Union.

Equity markets had an unusually smooth ride throughout 2017 with strong and widespread corporate profitability and ample liquidity underpinning higher equity prices; volatility was consistently close to record lows and no major shocks were observed. Bond markets could be described as having been a little choppier but remained within relatively tight ranges. Surprisingly, the euro turned out to be the strongest major currency, on the back of a much more stable political landscape than expected in Europe.

 

Equity markets were the drivers of portfolio performance

The main reason for our good performance was our decision to hold an overweight equity allocation throughout 2017. Even though fixed income exposures also contributed positively to last year’s returns, equities significantly outperformed, with above-average performances recorded across all regional areas. In contrast to 2016, alternative investments performed in a more satisfactory manner. Finally, an underweight dollar exposure for non-USD portfolios limited the negative impact of its depreciation.

The foundations of the global economy are solid

The global economy is in a good shape due to solid and sustainable growth being quite evenly spread across all the main economic areas. The positive global activity momentum and low inflation should extend well into 2018 and, at this stage, the probability of a recession appears very low. Political risks have subsided, in Europe in particular, while the world is getting used to Donald Trump’s very unorthodox way of leading the United States. Liquidity conditions are still very accommodative, even if 2018 will be a key year of transition, from the quantitative easing era to more mainstream post-QE monetary policies.

Equities remain our preferred asset class

For the beginning of 2018, we maintain our favorable outlook on equities and remain underweight towards fixed-income. Overall equity valuations do not appear excessive as earnings growth should continue, even

if at a slower pace. We do not have a strong regional preference for our equity allocation. The fixed-income exposure is tilted more towards unconstrained strategies and convertible bonds. We do not plan on taking a high degree of currency risk and expect our hedge funds allocation to remain towards the high end of the strategic asset allocation range.

Table 0f contents

  • EXECUTIVE SUMMARY
  • 2017: REVIEW OF OUR INVESTMENT THEMES
  • 2017: ECONOMIC & POLITICAL DEVELOPMENT
  • 2017: THE FINANCIAL MARKETS
  • 2018 : ECONOMIC OUTLOOK
  • 2018: FINANCIAL MARKETS’ OUTLOOK
  • 2018: ASSET ALLOCATION

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Investment Perspectives 2017 | Mid-Year Review & Outlook

Executive Summary

In this mid-year publication, we review our January expectations and analyse some current key economic indicators before outlining the asset allocation that we recommend for the second half of the year.

We had increased our equity allocation at the beginning of the year

On the back of our positive macro-economic and equity outlook for 2017, we positioned the portfolios dynamically by increasing the allocation towards the equity asset class. We had also expressed our confidence that equity prices should be supported by an acceleration of global earnings’ growth and, so far, this has effectively proven to be the case. We had reaffirmed our strong conviction on emerging markets and our early-year global equity exposure was well diversified into the different regions. We have since increased our allocations towards European and also emerging markets equities. Hedge funds were an area of concern following a disappointing 2016 performance, but the different funds to which we are exposed have performed much better so far this year and contributed to the strong performance of portfolios.

Global growth has not been derailed by the many political and geopolitical events

Global economic growth is broad based and, for once, has matched expectations. Contrarily to the previous years, growth forecasts have been upgraded generally as confidence is high and investment and trade are picking up from low levels. Europe was facing a series of elections that could have had negative consequences for the European project, but populist candidates failed to beat those in favour of more European integration. The election of Emmanuel Macron as French president has boosted the chances for serious reforms in France and for stronger unity in Europe, especially at a time when economic growth in the Eurozone has surprised on the upside. Donald Trump’s administration continues to make many headlines but is struggling to introduce a new health bill and much promised pro-growth reforms. US equity markets have so far proven to be resilient to such disappointments.

The main central banks are still hoping for higher inflation

For various reasons, the monetary policies of the Federal Reserve and the European Central Bank have diverged markedly over the last years. While the ECB remains extremely accommodative, the Fed has turned more hawkish through the acceleration of the pace of interest rates’ hikes and the announcement of a plan to start shrinking its balance sheet. On one issue however, both banks are in perfect agreement: the lack of persistent inflation, which is one of the last indicators to really pick up momentum in recent years. At this stage, the Fed appears more confident that inflation will move closer eventually to its target as wage pressures finally push prices higher, hence its confidence in its ability to pursue policy normalization. On its side, the ECB continues to tread cautiously, despite a significant reduction of political risks and strong economic trends. Inflation numbers will continue to be observed closely during the second half of the year to help to determine the likely path of future monetary policies.

We remain in risk-on mode for the time being

The supportive global macro environment and the prospect of strong corporate earnings lead us to remain in risk-on mode, with an overweight allocation into equities being the main driver of portfolio performance. Despite ongoing concerns about the stretched valuations of most asset classes, in the wake of unprecedented monetary policies, we believe it is still too early to turn cautious. Equity prices are being supported finally by an acceleration of earnings’ growth and no longer just by the provision of massive liquidity and the anticipation of stronger growth. Finally, markets are not yet showing any signs of euphoria which typically characterize the end of a bull market, hence our overweight equity exposure.

In the next section of the document, we will evaluate the macro environment and the prevailing financial conditions by highlighting several key indicators that we observe. Following a brief overview of the first half returns of the different asset classes, we will outline our current market outlook and asset allocation.

 

Table 0f contents

  • EXECUTIVE SUMMARY
  • THE MACRO ENVIRONMENT
  • FINANCIAL CONDITIONS
  • FINANCIAL MARKETS
  • MARKETS’ OUTLOOK
  • ASSET ALLOCATION 2nd HALF 2017

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Investment Perspectives 2017

Executive Summary

Political upsets and a major reversal of bond yields took place in 2016

The markets had a very poor start in 2016 due to concerns about China’s economy and weak commodity prices, before moving slightly higher until early summer. The June 23rd UK referendum, resulting in Brexit, was an unexpected shock which triggered another correction of equities and a collapse of Sterling. However, equity markets erased their losses within weeks before entering into a period of stability. Surprisingly the unexpected victory of Donald Trump triggered only a very short- lived bid for safe-haven assets, as risk assets recovered almost instantly and ended the year on a bullish note.

2016 will most likely also be remembered as the year when a 35-year bond rally finally came to an end.

 

2016 was about avoiding significant losses vs chasing binary performances

During 2016, we were positioned very defensively for three extended periods as we protected portfolios against a Chinese hard landing scenario and the threats of two unpredictable but major political events. We also took profits on gold and increased our exposure to emerging markets at opportune moments. Our long exposure to the US dollar proved rewarding while our exposures to long/short equity and global macro strategies failed to match return expectations.

 

An improving economic outlook for 2017

The economic outlook for 2017 appears more promising as global growth will be more balanced and concerns about China and emerging markets have receded. The main risks for 2017 are of a political nature, with important elections taking place in key European countries and the ability of Donald Trump to introduce new policies, as expectations are rather elevated. The main central banks remain accommodative, even if they have started to imply that their interventions have limits and cannot go on forever.

 

We have a clear preference for equities over fixed- income

For 2017, we have a positive outlook on equities and remain cautious on high-grade bonds. Our equity exposure will be balanced across the different regions and we maintain our confidence in emerging market equities. European equities should benefit from reasonable valuations and the continued support of the European Central Bank’s policies. Our search for yield will continue to focus on European loans and high-yield and we will be looking for a good entry point to gain exposure to emerging market debt. The US dollar should initially remain well supported but we do not expect this trend to last all through the year ahead. Gold is facing significant headwinds, but its role as a safe-haven asset could benefit if the high expectations related to Trump’s policies were not matched.

All of the above are likely to be affected severely by any major geopolitical event – something we will be monitoring closely.

 

Table 0f contents

  • EXECUTIVE SUMMARY
  • 2016: REVIEW OF OUR INVESTMENT THEMES
  • 2016: ECONOMIC & POLITICAL DEVELOPMENT
  • 2016: THE FINANCIAL MARKETS
  • 2017 : ECONOMIC OUTLOOK
  • 2017: FINANCIAL MARKETS’ OUTLOOK
  • 2017: ASSET ALLOCATION

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Investment Perspectives 2016 | Mid-Year Review & Outlook

Executive Summary

In this mid-year publication, we review our January expectations and analyse some current key economic indicators before outlining the asset allocation that we recommend for the second half of the year.

We had maintained a preference towards equities over high-grade bonds

Despite our long-term view that equities continue to offer better relative value to high-grade bonds, we took assertive measures in early January by significantly reducing our equity exposure, and raising cash to a high level, which contributed to limit part of the impact of severe market stress on the portfolios.

We had also indicated our increasing interest for emerging market equities, which became effective in March when we decided to increase our allocation to the asset class. Another key conviction was the need for additional portfolio diversification by investing into alternative strategies with low volatility and limited correlation to traditional assets.

Global economic growth has disappointed during Q1... and is not expected to pick up during the 2nd half

Once again, global economic growth has turned out to be inferior to forecasts, with the US economy only growing modestly during the first quarter and no other major economy being able to compensate for this disappointment. Growth forecasts for the whole of 2016 have recently been cut by the World Bank, the IMF and the OECD. These revisions were published before the unexpected decision of the British voters to leave the European Union, meaning that, if anything, uncertainties have only increased. One of the main reasons for this weakening outlook is the feeling that central banks are left with very few tools that can make a difference to the real economy and that governments are reluctant to introduce any kind of fiscal stimulus.

We are more defensively positioned and will look to increase risk only when attractive opportunities arise

In the light of deteriorating fundamentals, uninspiring prospects for companies to grow their profits and higher political risks, we have adopted a more defensive stance for the portfolios by reducing further our equity exposure and by maintaining the cash allocation above 10%. Our exposure to the US dollar was tactically increased during the first half and we took advantage of its appreciation after the UK referendum to take profits on half the position so, there again, we are now exposed to a lower level of risk. We have also consistently been adding to the alternative space in order to reduce portfolio volatility and to be less dependent on the direction of the markets.

Risk management has led us to hedge the exposure to European equities

The UK public opinion during the weeks preceding the referendum on whether to remain in or leave the European Union gave us very little conviction on the outcome of
the vote. We also evaluated that the downside of equity markets in the case of a “Leave” vote would be much bigger than the potential upside if the “Remain” vote were to win. We decided to hedge our exposures to UK and European equities in the light of such an asymmetrical profile tied to a binary event. Following the result, the hedge on UK equities was quickly lifted. We will maintain the temporary protection unless the prospects for European equities significantly improve.

In the next section of the document, we will evaluate the macro environment and the prevailing financial conditions by highlighting several key indicators that we observe. Following a brief overview of the first half returns of the different asset classes, we will outline our current market outlook and asset allocation.

 

Table 0f contents

  • EXECUTIVE SUMMARY
  • THE MACRO ENVIRONMENT
  • FINANCIAL CONDITIONS
  • FINANCIAL MARKETS
  • MARKETS’ OUTLOOK
  • ASSET ALLOCATION 2nd HALF 2016

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Investment Perspectives 2016

Executive Summary

Global GDP growth for 2015 once again failed to match up to early-year expectations. EM was a weak spot, with severe recessions observed in Brazil and Russia, while concerns over the slowdown in China affected the rest of Asia. U.S. GDP growth was well below the average January forecast of 3%, especially due to a weak first quarter. In contrast, the Eurozone fared well despite the Greek debt crisis, the slowdown of China and the ongoing tensions with Russia over Ukraine.

It turned out to be a very tumultuous year for financial markets. Commodities were under severe pressure for most of the year, mainly due to oversupply, high inventory levels and weaker demand. EM assets also performed poorly on the back of investor outflows and the prospect of higher US interest rates. European and Japanese equities fared the best, in local currency terms, mainly as the result of ultra-accommodative monetary policies. The dollar appreciated against all currencies, reflecting the relative strength of the US economy and the anticipation of higher interest rates, which were finally raised by the Federal Reserve during its last meeting of the year; this decision had been widely expected and was welcomed by the markets.

2016 global economic growth is expected to improve slightly, as the recovery in Europe gathers more momentum and as global emerging markets should do a little better, in particular due to less severe recessions in Brazil and Russia and a stabilization of China. The main central banks remain in accommodative mode, even if the Fed has started to hike rates. Some of the main risks for 2016 include an extension of the rout of commodities, especially oil, political issues such as Brexit, the rise of populism in Europe and US Presidential elections as well as geopolitical threats including instability in the Middle East and a deterioration of relations between NATO countries and Russia.

Throughout 2015, we gradually shifted the portfolios towards more flexible strategies, including non-benchmarked fixed-income funds, long/short equities and global macro. We increased our exposure to convertible bonds and also reinitiated an investment into US high-yield. We consistently remained very underweight EM assets and commodities, while being positively biased towards the dollar and DM equities.

For 2016, we remain positive on equities relative to high-grade bonds and maintain ouroverweight in developed markets equities over emerging markets. Our assessment is that European equities should benefit from the region’s economic recovery, reasonable valuations and the support of the European Central Bank’s policies. Our search for yield focuses on European loans and high-yield as well as investment-grade sovereign debt outside of Europe; we also believe that convertible bonds should perform well in the current market conditions and help to limit portfolio volatility.

Our view on the dollar remains positive, in particular against EM currencies, but also compared to the euro, whose value should continue to be impacted by the very accommodative policy of the ECB. Gold will have to face headwinds, including an appreciating dollar and higher US interest rates, but its role as a hedge could prove to be useful during periods of stress on other financial assets.

 

Table of Content 

  • EXECUTIVE SUMMARY
  • 2015: REVIEW OF OUR INVESTMENT THEMES
  • 2015: ECONOMIC DEVELOPMENTS
  • 2015: THE FINANCIAL MARKETS

 

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Investment Perspectives 2015 | Mid-Year Review & Outlook

Executive Summary

In this mid-year publication, we review our January expectations and analyse some current key economic indicators before outlining the asset allocation that we recommend for the second half of the year.

Our key message was that equities should do well...

In January, our main message was that risk assets, and equities in particular, should continue to be supported by a slowly improving economic background, by the accommodative policies of central banks and by better risk-adjusted valuations than those of debt instruments. We also expected the assets of the developed markets to outperform those of the emerging markets and for the U.S. dollar to appreciate against its peers.

 

Global economic growth has disappointed during Q1...but should improve during the 2nd half...

First quarter global economic growth turned out to be weaker than we had anticipated as the various economies produced mixed results. This weakness was largely due to an unexpected contraction of the U.S. economy which was affected by extreme weather on the East coast, port strikes on the West and consumers refraining from spending the money saved from lower oil prices. Lower rates of economic growth were also observed across most emerging markets with all the BRIC countries slowing down. However, on a brighter note, the Eurozone showed signs of a recovery on the back of a weaker euro, lower energy costs and ECB stimulus; the combined first quarter GDP of the 19 Eurozone countries was 0.4% higher than in the final three months of 2015. Japan also fared better-than-expected with first quarter growth being 1% higher than the previous quarter, mainly due to strong business spending. Overall, the signs for the second quarter show some improvement across the board and, looking ahead, we expect global economic activity to be stronger during the second half of 2015 and in 2016.

Equities remain our favourite asset class...with a bias towards Europe and Japan...

Our positive outlook on equities, and our bias in favour of developed markets, translated into solid portfolio returns until the end of May with Japanese and European stocks contributing the most. The month of June proved to be more challenging as equity markets gave up some of their earlier gains; increased uncertainty about Greece reduced some of the appetite for risky assets. Our caution towards highly-rated sovereign debt was vindicated (finally) by the sudden reversal of yields which had confounded expectations for so long. Our preference for leveraged loans, high-yield and convertible bonds turned out to be rewarding due to their low levels of duration and contraction of their spreads. Finally, our positive outlook towards the U.S. dollar generated a strong contribution to performance; more recently, we have locked in some of the dollar gains and adopted a more tactical approach towards currency exposures.

Risk management has led us to temporarily hedge some equity exposure...

The prevailing uncertainty surrounding the Greek crisis has led us recently to hedge part of our allocation to European equities as a way of managing risk in face of an unpredictable outcome. At this stage, we are still committed to an overweight of the equity asset class and an avoidance of highly-rated sovereign debt. Early in the year, we reinitiated a position into physical gold as a hedge against extreme risks and as a way to diversify the portfolios.

In the next section of the document, we will evaluate the macro environment and the prevailing financial conditions by highlighting several key indicators that we observe. Following a brief overview of the first half returns of the different asset classes, we will outline our current market outlook and asset allocation.

 

Table 0f contents

  • EXECUTIVE SUMMARY
  • THE MACRO ENVIRONMENT
  • FINANCIAL CONDITIONS
  • FINANCIAL MARKETS
  • MARKETS’ OUTLOOK
  • ASSET ALLOCATION 2nd HALF 2018

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Investment Perspectives 2015

Executive Summary

Global economic growth disappointed in 2014 with weakness observed across many regions. The euro zone, including Germany, was impacted by a slowdown of economic activity and by the backlash of sanctions imposed on Russia following its annexation of Crimea in March. In contrast, the US economy grew at a healthy rate. This divergence of growth trends between the US and the rest of the world was also reflected by the diverging monetary policies of the major central banks.

In 2014, the financial markets were characterized by an unexpected rally of sovereign bonds due to the absence of inflation and the accommodative stances of central banks. During the second half, the dollar finally matched expectations as it appreciated strongly against all currencies. As in 2013, US equities outperformed those of the other developed markets and emerging markets struggled. Commodity prices were under persistent selling pressure during the second part of the year, acerbated by a China effect, with oil prices plunging by more than 50%.

Global economic growth is expected to pick up modestly in 2015, but the level of risk is rising. Europe will have to contend with a potential exit of Greece, a number of elections on the calendar and high levels of expectations related to ECB monetary easing. The Federal Reserve will have to tread carefully to avoid upsetting finely balanced markets while oil-producing countries will have to cope with shrinking oil revenue as prices have declined to 5-and-a-half year lows.

A number of investment decisions impacted the profile of our portfolios throughout 2014 even ifthe allocations to the different asset classes remained much the same. Back in January, we sold our remaining exposures to emerging market debt in local currencies and to physical gold; in March we then reduced our allocation to emerging market equities. Other key moves were to replace a portion of our European high-yield position by Europeans loans and to increase developed markets equities in May; during the summer, we sold US high-yield bonds to invest into an unconstrained US fixed-income strategy and initiated a positive call on Japanese equities.

At the beginning of 2015, we have reduced our overweight into the equity asset class but maintained our preference for developed markets equities over those of the emerging markets. Over the course of the year, equities should benefit from better valuations compared to bonds and from the accommodative policies of central banks. Furthermore, the search for yield will continue to attract investors towards the high dividends distributed by blue chip companies. Our allocation to debt instruments will remain underweight as the risk/reward profile of highly-rated sovereign bonds is more asymmetric than ever. Our search for yield is focused on investment-grade sovereign debt outside of Europe and the US and on European credit, high-yield and loans.

Despite the overwhelming market consensus, we expect further appreciation of the US dollar. We continue to avoid the commodity asset class as fundamentals have deteriorated over the last year due to slowing Chinese demand, ample supply, a stronger dollar and low inflation. Finally, the outlook does not look too promising for gold as some of its market dynamics have weakened during the past years; a firm dollar and the risk of a rise of real interest rates represent headwinds that are difficult to ignore.

 

Table 0f contents

  • EXECUTIVE SUMMARY
  • 2014: REVIEW OF OUR INVESTMENT THEMES
  • 2014: ECONOMIC DEVELOPMENT
  • 2014: THE FINANCIAL MARKETS
  • 2015 : ECONOMIC OUTLOOK
  • 2015: FINANCIAL MARKETS’ OUTLOOK
  • 2015: ASSET ALLOCATION

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