Investment Outlook (Q2/2018)

The Investment Outlook for the second quarter of 2018 has been published.
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“He who wishes to fight must first count the cost”

— Sun Tzu, The Art of War

Macro Environment

  • Inflation pressure in developed markets is picking up slightly
  • European recovery still intact while dynamics are weakening
  • US sentiment & confidence remain intact
  • Emerging markets show no signs of growth weakening

Outlook and Markets

  • Risks for equity markets increases further as valuations remain stretched, especially in the US
  • Volatility spikes remind investors of persistent risks
  • Fed still on track to tighten further and might be forced to step in more resolute
  • Productivity growth continues to be located in emerging markets rather than in developed economies
  • Trade frictions between the US and the rest of the world, mainly China, increase and threaten growth

Main Investment Calls

  • Remain cautious and keep a neutral position of the return and income portion in the model portfolio
  • Increase cash allocation to overweight
  • Equities over Sovereign Bonds
  • Emerging over Developed Equities
  • EMD and Investment Grade Credit over Sovereign Bonds
  • TIPS as an (unexpected) inflation hedge

Main Risks

  • Global trade war initiated by tit-for-tat escalation between the US and the rest of the world, mainly China
  • As a result, higher inflationary pressure in the US and elsewhere, increasing the need for more resolute centralbank tightening
  • Higher than expected inflation in the US, coupled with substantially increased spending leads to more than theexpected rate hikes by the Fed and choke off economic momentum, leading to a possible recession
  • Risks of policy missteps as China continues the attempt to rebalance its economy from an unsustainable export-oriented one to a more domestically supported one and impose too strict regulatory frameworks on banks
  • The potential for the long-held geopolitical equilibria in the Korean Peninsula and Middle East to be shaken upremains

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