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In doubt, no one despairs


MONTHLY INVESTMENT BRIEF 

NOVEMBER 2019

 

Laurent Denize

Laurent Denize,
GLOBAL CO-CIO &
GLOBAL HEAD OF FIXED INCOME


We therefore recommend the following strategy: stretch out your investments in risky assets

With equity markets up by an average 20% worldwide, and with all asset classes into positive territory, the question inevitably rises: what to do now? Take some profits or stay invested?  

Macroeconomic view: Despite seemingly stabilising economic indicators in China, as well as in the US and Europe, the markets could have trouble dealing with what seems to be the end of an unprecedented global monetary easing cycle. The market will have to manage the disparities between persistent expectations of easing in developed and emerging market economies (an additional 30bps from the Fed, another 10bps from the ECB, etc.), and the reality of central bank decisions. Hitting the reset button on expectations would probably mean a rise in long bond yields and, hence, capital losses on government bonds.

A solid job market and rising ISM manufacturing index are providing additional proof that the US economy is still in good health. If, as we expect, global growth levels off, or even accelerates a bit (from +3% to +3.4%), there will no longer be any need to lower key rates. Central banks, meanwhile, are at the end of their rope and believe that monetary policy can no longer support growth, as was the case previously. So, if the economy does run out of steam, it will be time to activate tax or budgetary levers. That could happen in 2020.

Microeconomic view: In the United States, third-quarter results are surprisingly strong (with positive surprises up 4.86%). In Europe, they are, on the whole, in line with forecasts, albeit after those forecasts had been slashed. Companies are likely to benefit from better growth prospects, monetary easing, and the de-escalation of trade tensions. Cyclically exposed companies and mid-caps are likely to be the first beneficiaries of this short-term trend. Even so, analysts’ expectations are still too high and are likely to hold back EPS growth-driven performances. So reratings (and therefore lower risk premiums) and high dividend payout rates will be needed more than strong earnings growth.

Flows: There’s no getting around it:  never has a such a rally come with such heavy outflows from equity funds. In the event of a rebound in economic indicators and a further receding of geopolitical risks, market gains could be driven by the return of both institutional and retail investors.

Valuations: This is where the greatest uncertainty likes. Are equities expensive or cheap?

Among listed assets, only equities offer value, with implied returns of almost 7% in an environment of low, or even negative, interest rates. Credit can offer an attractive carry alternative, although risk premiums appear to offer less absolute and relative value.

Positioning: Despite the risks to the global economy, investors are likely to continue to overweight equities to bonds in a balanced portfolio.

As a countercyclical currency, the US dollar is likely to weaken amidst an improvement in global growth. The combination of stronger growth and a weaker dollar could boost commodities prices and, hence, emerging markets.

In terms of styles, cyclical sectors are likely to outperform defensives in the short term, but without a sustained rotation into them.

Ten-year yields will stay low for some time to come but are unlikely to fall any further. Even in the event of a recession, reflationary stimulus plans would limit their safe-haven impact.

Even so, a strong macroeconomic signal is still needed for an aggressive rotation back into equities, especially in the event of a slight rise in interest rates.

We therefore recommend the following strategy: stretch out your investments in risky assets (currently equities) on a monthly basis, in order to ride the cycle with a five-year minimum investment horizon.

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