Asset Allocation Quarterly
So far so good, but markets underestimate risks
• Asset returns were mixed in Q3 2018, with US equities in the lead, but other markets lagging, as investors digested the risks from emerging markets (EM), Italian politics and advancing trade protectionism.
• In September, however, equities and bond yields rose, suggesting that markets had become less preoccupied about these risks.
• We disagree with this assessment. We still see the risks associated with US-China trade tensions, Italian politics and US monetary policy normalisation as a force that will weigh on markets in Q4 and 2019.
Asset Allocation Quarterly - October 2018
Central banks induce regime shifts
SUMMARY: US equities continued to outperform other markets such as EMU and EM equities. This partly reflects the divergence between the US economy -which is supported by fiscal expansion and a patient Federal Reserve- and relatively weaker growth in the eurozone and EM. But there is more to this divergence than faster US economic growth. The US equity rally has been led by the IT sector. This has accounted for 20%-50% of US equity returns since 2016. The rally is now looking stretched on various metrics. The other salient development in August was renewed stress in emerging markets (EM). A combination of economic stress in Turkey, weaker growth in China, Sino-US trade tensions and a stronger US dollar hurt EM assets. We believe there is value in EM assets, but the obvious circuit-breakers are still absent: a weaker USD, aggressive China stimulus and fresh Sino-US trade talks. EM assets prospects have soured and protectionism and tighter liquidity continue to cloud their longer-term prospects.
Watch out for the effects of factors such as rising interest rates and the end of central bank asset purchases