Economics

Economics and Financial Markets(2)

April 2019

05/04/2019

Giovanni Leonardo

Giovanni Leonardo

Head of Investment Wealth Management Switzerland

Norbert Brestel

Norbert Brestel

Head of Investment Solutions

Monetary tightening on hold

The US, European and UK central banks reacted very quickly to the economic slowdown and refrained from further tightening monetary policy. They have clearly learned from previous mistakes, having triggered recessions in the past due to overly restrictive monetary policies. The looser monetary policy this time will support global growth and cushion the impact of political risks. With valuations still fair to favourable and the level of investment by market participants low after the major sell-off at the end of 2018, we are maintaining our preference for real assets, which should benefit even in an inflationary environment. We prefer quality equities, emerging market bonds and inflation-linked bonds. After the strong price gains in the first quarter, we took some profits and slightly increased liquidity.

Global economic growth has slowed further in recent quarters. Taking an overly pessimistic view, the stock markets saw the slowdown at the end of 2018 as reason to initiate a sharp correction. These losses have been recovered this year, and valuations point to a less negative outlook. We have lowered our growth forecast for the current year from 2.9% to 2.8%. Contrary to the thesis often advanced in the media that the inverse yield curve in the US is a clear sign of a recession, our models are not yet giving us any recession signals. Moreover, economic literature shows that several years can often elapse between the occurrence of an inverse yield curve and a recession.

After a strong first quarter, we took some profits in our portfolios and slightly increased liquidity due to increased market volatility. However, we remain constructive on equities, inflation-linked bonds and emerging market bonds. We are invested in secular themes such as technology and health. Our preferred regions are the US and the emerging markets. At the end of last year we built up positions in Chinese A-shares (Chinese equities listed in Shanghai and Shenzhen) in more aggressive strategies. Interestingly, the Chinese stock market is already larger than all European stock markets put together. The Chinese A-share market stands to benefit from institutional investors who want to participate in
the Chinese economy in real terms. The MSCI recently included A-shares in its index.

I anticipate that with growth rates close to zero, we will we heavily exposed to the temporarily gloomy outlook caused by political risks. Growth expectations can fall below zero very quickly. We must therefore prepare ourselves for a sustained period of higher volatility. Particularly in phases of increased fluctuation, it is important to be able to stay true to your chosen strategy. To maintain your strategy, you should not take any excessive risks, as you might otherwise be forced to sell during difficult market phases. Take the opportunity at the beginning of the year to discuss your chosen strategy with your adviser.

Giovanni Leonardo

Giovanni Leonardo

Head of Investment Wealth Management Switzerland

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Giovanni Leonardo

Giovanni Leonardo

Head of Investment Wealth Management Switzerland

Norbert Brestel

Norbert Brestel

Head of Investment Solutions

 

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