“When the mind is in a state of uncertainty the smallest impulse directs it to either side.”
Publius Terentius Afer (Terence) (195/185 – 159 BC)
Macro Environment
- Inflation pressure in developed markets remains
- Trump’s incoherent policy (and Twitter) choices increase uncertainty further both domestically and globally
- Political
and economic risks remain at the forefront in the Euro area (elections
in France and Germany, the ongoing Greek dilemma , etc.) - Invoking
Article 50 for the UK’s withdrawal from the EU marks the beginning of
hard negotiations. A hard Brexit is highly likely.
Outlook and Markets
- Risks for equity markets increase as doubts about Trump’s “deal making” skills in politics rise
- Increased volatility across asset classes and regions ahead with the new US administration still lacking any coherent policy
- BoE and ECB on hold for the time being, Fed is preparing 2-3 rate hikes in the coming quarters
- Productivity growth continues to be located in emerging markets rather than in developed economies
Main Investment Calls
- Reducing risk – lowering the overall weight of the return portion within the overall model portfolio
- Equities over Sovereign Bonds
- Emerging over Developed Equities
- High Yield, EMD and Investment Grade Credit over Sovereign Bonds
- TIPS as an (unexpected) inflation hedge
Main Risks
- Global trade war initiated by erratic and extreme protectionist measures by the Trump administration
- Substantial
growth slowdown in China puts further pressure on commodities and
export oriented countries predominantly in Asia but also elsewhere - Higher
than expected inflation in the US coupled with tax reductions and
substantially increased spending lead to more than expected rate hikes
in the US - Election win by the Front National increases the likelihood of a Euro breakup dramatically
- Middle
east conflict escalates further and sends oil prices sharply higher –
leading to substantially higher inflation in the US, but also in the
Eurozone and in the UK - Tensions between the US and North Korea increase substantially and send shock waves throughout financial markets
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