Investment Perspectives, July 2019

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. 

CONTENTS

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

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Tags: Investment outlook