In this mid-year publication, we review our January expectations and analyse some current key economicindicators 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.
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.
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.
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.
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 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.