Investment Outlook (Q3/2018)

The Investment Outlook for the third quarter of 2018 has been published.
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A boxing match between the USA and China

“Today is the first day of the war with China”

Ray Dalio – July 6, 2018

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 growth remains robust

Outlook and Markets

  • Valuations remain stretched, especially in the US
  • Trade frictions between the US and the rest of the world, mainly China, increase and threaten growth
  • Fed still on track to tighten further but might be forced to change stance due to trade frictions
  • Productivity growth continues to be located in emerging markets rather than in developed economies

Main Investment Calls

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

Main Risks

  • Full scale global trade war 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 against the background of weakening employment and confidence numbers
  • Higher than expected inflation in the US, coupled with substantially increased spending leads to more than the expected 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

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