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 first quarter was a tale of two halves with January delivering some of the best monthly equity returns in years, quickly superseded by a correction with equity markets down 10 per cent. The V-shaped recovery that we correctly predicted faded as Trump’s tariffs left investors uneasy, creating a cloud over the ‘synchronised global growth’ narrative.
What do Trump’s tariffs mean for global growth and the interconnected global trade system? Trouble ahead for the “Goldilocks” narrative or a negotiating tactic? We argue it could well be both.
The first tariffs on steel and aluminium were largely a pressure point, focused on Canada and Mexico during NAFTA negotiations. Days after the tariff announcement, most US allies were exempted until further notice.
The most recent, China-directed tariffs go beyond trade balance. In our view, they signal a tug-of-war between two superpowers for the upper hand in the new digital economy, encompassing artificial intelligence, digital payments, cybersecurity and intellectual property rights.
In a ‘tit for tat’ trade war, the only outcome is lose-lose.
While the economic implications of tariffs on global growth are not significant, sentiment and inflation implications raise concern. The problem will start when Goldilocks finally meets the three bears and market participants readjust their views and positions in equity and bond markets.
Our macro playbook for the second quarter suggests higher inflation in the US, moderation of global economic growth (within a healthy macroeconomic backdrop) and a continuation of the rates normalisation process. We expect markets to remain volatile as the political ramifications from trade war rhetoric face up to the upcoming earnings season, where we expect further signs of corporate health.
The lack of consensus, persistent volatility and the Fed’s commitment to policy normalisation continue to send mixed signals to both equity and fixed income investors. We turn neutral on global fixed income, with a preference for US credit on an absolute and relative basis. ‘Carry is king’ within the investment grade and high yield space, but we look for short duration issues from high quality companies despite tight spreads globally. A hawkish Fed within equity volatility and a reluctant ECB to tapering will keep rates at current levels, although the steepening bias in our positioning remains firm.
The Facebook data breach may cause temporary profit-taking but the long-term story remains intact.
Turning to equities, we adopt a more neutral stance keeping our preference for eurozone and growth-sensitive sectors. Ahead of the earnings season, (and in anticipation of a relief rally), we look for opportunities in the financial, consumer and technology sectors. The recent data breach scandal that sent Facebook stock sharply lower (and Trump’s obsession with Amazon) may cause temporary profit-taking in the technology sector, but the long-term story remains intact. High dividend companies in both the eurozone and UK appear attractive and combined with a positive sterling outlook constitute an interesting opportunity for international investors.
Ultimately, our long-term thesis for higher rates and higher equities remains unchanged, but we acknowledge that equity markets could test recessionary levels from the 26 January high and sentiment could worsen before it gets better. As such, we remain neutral across asset classes with selective buying and await confirmation from the market for the next leg up.
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