“Supreme excellence consists of breaking the enemy’s resistance without fighting.”
Sun Tzu, The Art of War
Macro Environment
- No significant inflation pressure in developed markets
- European growth loses further momentum
- US consumer confidence remains intact while capital markets focus on international trade woes
- Emerging markets set to rebound after last year’s slowdown
- Corona virus in China has to be watched carefully
Outlook and Markets
- Valuations remain stretched in a lot of markets
- Easing of trade frictions between the US and China as a tailwind for markets. Trump’s Tweets continue to be a major market mover
- Fed remains under (mostly political) pressure to cut rates substantially
Main Investment Calls
- Stay cautious and maintain a neutral stance between the income and the return part of the portfolio
- Overweight in Cash
- Overweight in Sovereign Bonds as a recession risk buffer
- Overweight in Emerging vs Developed Equities
- EMD and Investment Grade Credit over Sovereign Bonds
Main Risks
- Full scale trade war between the US and China, escalating further also on a political level despite the recent agreement on “phase-one”
- Higher than expected inflation in the US due to higher import tariffs, coupled with substantially increased spending leads to the Fed needing to restart hiking rates, thus choking off economic momentum, leading to an earlier and deeper recession
- Unexpected fallout from a chaotic Brexit could lead to another Euro crisis and put global growth at risk
- Risks of policy missteps as China continues the attempt to rebalance its economy to a more domestically supported one and impose too strict regulatory frameworks on banks
- Further escalation of the Iran-US conflict, sending oil prices substantially higher, leading to higher inflation rates and more pronounced recessionary tendencies
- Spreading of the Corona virus leading to a short term disruption of supply chains and panic selling of risk assets
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