We combine deep qualitative analysis by our team of investment specialists with powerful quantitative analysis from our proprietary software to inform an unconstrained approach for strong, risk-adjusted returns.
The recent declaration by the Trump administration about imposing tariffs on steel and aluminium imports is causing great concern and equity volatility is on the rise again. We are monitoring developments closely, as an escalation towards trade wars could jeopardise the global recovery and change the synchronised growth narrative. It is clear this move will weaken the US dollar with direct beneficiaries the emerging market space and commodities. Whether EM and commodities can sustain a global slowdown remains an open question.
“An escalation towards trade wars could jeopardise the global recovery.”
In the aftermath of the technical correction during February, equity markets recovered quickly (v-shaped) only to encounter new obstacles (such as Trump’s isolationist policies and a more hawkish Fed). The main reason for the increased anxiety is the absence of safe haven alternatives. A more hawkish Fed reduces gold’s appeal, low or negative real government yields around the world make bonds an overvalued asset class, and Trump’s isolationist policies are shaping the US dollar’s downward path.
Fed Chairman Powell, during his testimony before the US Congress this week, hinted four hikes for 2018. Under a four hikes and strong US economy scenario, we expect the 10yr yield closer to 4 per cent by year end. A higher inflation reading with higher yields (short and long end) within an upward sloping curve does not concern us. Trump’s policies do.
In Europe, where positive equities momentum seems nowhere to be found, investors are still trying to find a balance between the strong macroeconomic backdrop, pending political results, and Dalio’s massive short bet against the region. Major risks are the pending confirmation by SPD members of the grand coalition in Germany and the upcoming elections in Italy.
“We changed our allocation towards a neutral stance as we believe March to be the decisive month for the next move in equity and fixed income markets.”
In general, risky assets would require some time to consolidate around current levels within heightened volatility as the excessive Sharpe ratios of the major equity benchmarks we have been witnessing for the past years need to normalise. For this reason, we decided to move our allocation towards a neutral stance as we believe March to be the decisive month for the next move in equity and fixed income markets. Our long-term thesis for higher rates and higher equities has not changed, but we find it prudent to remain on the side-lines during March. We still like European equities, US technology, and financials but everything depends on the macroeconomic backdrop.