Global Asset Allocation Strategy: Clear as fog

Michael Livijn, chief investment strategist.
19-09-30 12:45 | Markets and investments

The risk-on/risk-off environment, or behaviour, of the markets continues. September proved to be a comeback after the trade/tweet-ridden August, and equities are again flirting with all-time-highs. Also, the steep fall in global yields reversed somewhat, but many yields remain extremely low.

Going forward, markets are still looking for more credible signs of an economic stabilisation, which has yet to show up.

Central banks are upping their game with more stimulus but geopolitical uncertainty/manufacturing malaise continues to pose a risk to the outlook. With this foggy outlook, we keep our neutral stance between equities and fixed income.

September marked the return of happier markets, but the global economy is currently showing few signs of turning around. Several indicators, such as PMI:s, are still in a downward trend, especially in the manufacturing sector. Services are holding up better, but the risk of ripple effects is present.

So far, the main victims from the trade dispute between the USA and China seems to be not themselves but Europe (especially Germany) and to some extent, Japan and select emerging markets. Overall, global growth is hardly crashing, but the gradual deterioration and few signs of a turnaround is a worry. The trade dispute hardly makes things easier. While the tariffs (and counter tariffs) in themselves are quite insignificant compared to global trade, the confidence channel should not be underestimated.

In an uncertain environment, it is easier for companies (and consumers) to take a step back, thereby depressing investment and consumption further. However, be mindful of how much gloom is discounted. Economic surprises have started to turn around, a sign that expectations indeed have reached a low level. That begs the question if the market has become too pessimistic on the macro side.

The big counter-weight to the trade/growth worries has been monetary policy, notably since the now famous “dovish pivot” from the Federal Reserve in December last year. And since the Fed cut in late July, several central banks have followed in cutting rates, and Fed again cut rates in September. More might come as liquidity frictions in the US could raise the odds for some kind of QE program. ECB also joined the fray with a rate cut, a restart of the QE-program and a tiered deposit system for the banks. Basically an “all-in” approach.

However, the central bank toolbox is getting emptier, with much of the developed world already at zero or negative policy rates. Hopes are also rising for more expansionary fiscal policy, notably in Europe but also in China, which would probably be a positive for markets. For now, markets are relying on the central bank “put”, which has supported markets throughout 2019. It continues to be a backstop, but markets are also mulling just how long the monetary tool will suffice as it so far has failed to lift inflation back to target.

The confluence between the trade dispute, the global growth outlook and central banks is indeed at the centre of the current market environment. Indeed, the wild swings the last two months are a testament to that confluence.

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