Investment strategy 4th quarter 2019

Politics is holding back the macro cycle

Sentiment on the global economy has waned considerably among the public, or at least among those in the know. In recent years, there have rarely been so many articles about the risk of a recession. This is because the macro cycle is maturing and has even become the longest on record in certain countries, like the USA. But it is also because the US yield curve has inverted, another sign that the cycle is nearing an end.

But with consumer spending on the rise, we think these fears are overblown. Spurred by the drop in unemployment and the increase in wages, consumer spending is doing well across the board and has yet to be dragged down by the more lacklustre manufacturing sector, which has been hit hard by the US-China trade war. These tensions have weighed on manufacturing confidence around the world and caused capex to slide, but they could ease as Donald Trump gets ready for the campaign trail and his re-election bid in late 2020. The Middle East has also moved back into the spotlight as another source of geopolitical tensions. The global economy, made fragile by the US-China trade spat, is clearly in no shape to deal with an oil crisis.

Central banks, especially those in the world’s main economic regions, are having to take steps to counter these political uncertainties. Inflation remains under control, so interest rates are being cut almost everywhere. Some central banks have also started injecting money into the economy again, including the European Central Bank (ECB), which has announced a new asset purchase programme. As a result, Swiss and eurozone sovereign bond yields are among those that have plummeted to new lows. Negative yields have become more widespread on the capital markets, except in certain countries, like the USA and Italy, and in some riskier segments of the bond market. We have therefore increased our weighting in US corporate bonds and reduced our exposure to European and Swiss issues.

Other asset classes can provide an attractive alternative to the paltry returns offered by bonds. Equities offer the best prospects, since valuations are still reasonable on a historical basis. Real estate should also fare well in the current environment. On top of Swiss real-estate funds, which are included in CHF-denominated portfolios, we have added international real estate to all of our investment profiles through a specialised fund. In terms of currencies, the euro will be under pressure in the short to medium term due to the aggressive stimulus planned by the ECB, and the Swiss National Bank will have to take steps to prevent the franc from gaining too much ground. The US dollar should do well given that both nominal and real interest rates are negative in Europe. Emerging currencies still offer some upside, especially if the trade tensions ease.