“Denial ain’t just a river in Egypt.”
Mark Twain
Macro Environment
- Inflation pressure in developed markets subsides for the time being as oil prices fall
- European recovery maintains momentum – Election results in France bolster confidence
- US sentiment & confidence is well ahead of hard economic data
- Emerging markets growth remains robust
Outlook and Markets
- Risks for equity markets increase as hard data fails to catch up with overly optimistic sentiment data, mainly in the US
- Increased volatility across asset classes and regions ahead
- Fed still on track to tighten further – balance sheet adjustments will become market focus
- ECB and BoE continue to change wording to prepare markets for an exit of their loose monetary stance
- Productivity growth continues to be located in emerging markets rather than in developed economies
Main Investment Calls
- Reducing risk further – lowering the overall weight of the return portion to neutral
- 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 - Lower
than expected growth in the US, coupled with tax reductions and
substantially increased spending lead to more than expected rate hikes
in the US and a possible recession within the next 18 months - Middle
east conflict(s) in Syria, Qatar etc. escalate further and send 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 and escalate further to send shock waves throughout financial markets
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