Market volatility has increased in recent weeks but is unlikely to affect our view of the financial markets and economic environment. In fact, the current climate forces us to maintain a cautious positioning in managed portfolios, resulting in an underweight position on equities.
Across the Atlantic, the economy is about to enter its 10th year of growth – an exceptionally long period – even though recovery has been slow by historical standards. While it would be premature to talk about recession, growth has probably already peaked.
The less expansionary monetary policy, strength of the dollar and gradual reduction in the positive effects of fiscal policy are all expected to hamper growth. Elsewhere in the world, there are increasing signs of an economic downturn. This is particularly noticeable in the eurozone, an area where the flash composite PMI is at its lowest level in four years. Social unrest is negatively impacting business, particularly in France. Sluggish growth in Italy also continues to give cause for concern, especially since the expansionary measures advocated by the government are unlikely to boost the country's – very low – growth potential. The eurozone, which is highly exposed to a slowdown in world trade, has little room for monetary or fiscal manoeuvring in response to further economic downturn.
China the centre of attention
In the emerging markets, all eyes are on China, which is in the throes of a major trade dispute with the United States. The Chinese economy is slowing down, hampered by weaker internal dynamics. The confidence of Chinese exporters, which is in free fall, also suggests an abrupt slowdown in export momentum if no progress is made with the United States. While there have been more encouraging signals in recent days, it seems a tall order indeed for the two countries to reach a major agreement over trade within the next three months.
Valuations less stretched but based on ambitious expectations
In an encouraging sign, equity market valuations appear to be less stretched after the correction in recent weeks. However, earnings growth expectations are still ambitious, especially in Europe. Earnings will therefore probably continue to be revised downwards in the coming months.
Against this backdrop, we prefer to take a cautious approach and will be maintaining our underweight position on equities in favour of liquidity, which can be redeployed very quickly in the event of market volatility. When it comes to bonds, we favour significant exposure to emerging markets’ hard currency debt and US government debt. Gold – a safe haven asset – complements our allocation.
For more information about market developments and the impact on your investments, please contact your private banking adviser.