Investment strategy – 1st quarter 2020

Central banks’ loose monetary policies, the weaker dollar and the easing of US-China trade tensions should prompt an uptick in global growth. Stock markets still offer substantial upside, although they are unlikely to do quite as well as they did in 2019.

 

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Stockmarket cycle continues as global economy picks up

The risk of recession has subsided in the USA and the rest of the world. Low inflation enabled most central banks to bring in further stimulus measures, which are now starting to pay off. Consumer spending, spurred by rising wages and declining unemployment, is robust across the board, but the same cannot be said of manufacturing output, which is flagging everywhere. However, there are early signs that the manufacturing sector is starting to bounce back. International trade should also pick up now that the USA and China have come to a truce. But geopolitical tensions have not totally disappeared, and there’s always the risk of fresh turmoil in the Middle East. Still, the main thing that could derail the economic uptick forecast for this year is a sharp rise in oil prices. At a time when investors appear relatively sanguine, we will also have to pay close attention to inflation. Although it has been undeniably sluggish in recent years, it’s unrealistic to think that it’s gone for good.

We forecast a slight upturn in prices as wage growth picks up and certain commodities bounce back. In portfolios, we recommend some exposure to industrial metals, which should be buoyed by the economic recovery and the increase in infrastructure spending.

We expect interest rates to rise slightly in the long term. This means that bond markets will offer very few opportunities, except when it comes to emerging-market debt and especially debt denominated in local currencies, as those currencies should gain ground against the US dollar. At the same time, we have reduced our exposure to the greenback in most of our investment grids – the dollar tends to fall when growth is accelerating at a slower pace in the USA than it is elsewhere in the world.

The economic recovery will be driven first and foremost by emerging markets, particularly those in Asia. We have therefore increased our exposure to equities on Asia’s emerging markets, at the expense of Japanese equities. Prices have gone up on Japan’s stock market in recent months, even though the economy is still being dragged down by the sales tax hike brought in last autumn. More broadly speaking, we continue to take a constructive stance on equities, which offer more upside than other asset classes, even if it will be more limited than in 2019.

For Swiss-franc portfolios, we are reducing the euro’s weighting through currency hedges. The Swiss National Bank (SNB), which has been heavily criticised for its negative interest rates policy, now seems willing to tolerate a rise in the franc, provided the outlook for the Swiss economy remains robust. Finally, we are reducing our allocation to Swiss real-estate funds – the sharp rise in mortgage debt among Swiss households should lead to some form of stabilisation in property prices after off after years of rising non-stop.

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