Market Insights – 12th of August 2019

Each week, a team of experts shares its market views with you.

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Top view on lake Geneva, Switzerland on a nice sunny day


After proving to be surprisingly resilient at the start of the year, Switzerland’s economy – just like those of its main European trading partners – slowed sharply in July. At 44.7, the country’s manufacturing PMI sunk further into contraction. This disappointed economists, who had expected it to remain at its June level of 47.5.

Gold prices have soared to USD 1,500 per ounce on the back of the renewed escalation in the US-China trade war. Gold is clearly being buoyed by its safe-haven status, as well as by the soft dollar.

Chinese exports unexpectedly picked up in July, rising 3.3%. Demand from Europe, South Korea, Taiwan and other South-East Asian countries largely offset the continued drop in US demand and other negative impacts of the trade war.

Adjusting our equity exposure

Stock markets have experienced an uptick in volatility in recent weeks. The slew of bad news and far-from-positive events prompted investors to move into less risky assets, especially sovereign bonds. Although the US Federal Reserve delivered its first rate cut – of 25 bps – in over a decade, it adopted a less accommodative stance than expected, which dampened investor enthusiasm. Jerome Powell was surprisingly vague about the rate path ahead, denting hopes of further cuts this year. Some – including President Trump – accused the Fed of being too timid, given that recent economic data suggest the US economy may be running out of steam. We think the Fed – like other major central banks – needs to be ready to take action should the economy take a turn for the worse. And among central banks, the Fed has the most leeway to boost its domestic economy. We think the US-China trade dispute is more of a concern at present. In a further escalation, Trump announced that he would slap a 10% tariff on the remaining USD 300 billion in Chinese imports starting on 1 September. Washington put this additional pressure on Beijing after talks between the two superpowers ground to a halt – suggesting that the dispute is unlikely to be resolved any time soon. China retaliated immediately, devaluing its currency and stopping purchases of certain agricultural products from the USA. This latest development was not part of our core scenario. Given the lack of visibility, we have decided to slightly reduce the risk in our portfolios and take profits on US equities. We are also reducing our exposure to Japanese equities so that it is closer to neutral, in light of the gloomy outlook for Japan’s economy, which has already slowed sharply and could be hurt by the upcoming rise in the sales tax. What’s more, the yen, which is often used as a safe-haven currency in times of stress, is negative for its exporting companies as it strengthens – another reason that urges us to be cautious on Japanese stocks.

Alternative funds – nothing but beta

Alternative funds have continued to do well on the back of their good performance in the first quarter. Following several tough years, systematic strategies have come out on top. Although they have been held back by heightened stock-market volatility, the uninterrupted trends in the currency and interest-rate markets have enabled them to generate solid returns. Despite their “black box” behaviour and high volatility, we think it makes sense to include these strategies in a portfolio, for diversification purposes. Long/short equity strategies have done well overall, but individual returns within this category have been very mixed. Those focused on emerging markets or Japan, along with market-neutral strategies, have struggled the most, while US funds – especially those investing in the tech sector – have performed strongly. We are on the lookout

for the best opportunities offered by relative value volatility strategies. Despite underperforming since the start of the year, these strategies can do well out of complicated market conditions, which makes them very appealing at present. But the holdings are not always very liquid. Investment vehicles that offer greater liquidity than their underlying assets have run into problems this year, so we prefer funds with offshore structures rather than those that allow investors to redeem their cash on a weekly – or even daily – basis.

To go deeper


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