2019 Q4 outlook: Positioning for a sideways market
As the global economy heads for a structural and cyclical slowdown, the appeal of fixed income and, in some instances, credit is evident. We see value in the periphery of Europe, European credit (including the ultra-safe covered bonds) and some financial debt. Beyond this, the outlook for equities after two quarters of a mild earnings recession is weak growth ahead. This translates into somewhat subdued equity returns while central bank easing should limit the downside and eventually help the upside. In such an environment of sideways markets, we continue to prefer resilient portfolios and defensive equities such as listed real estate and infrastructure as part of a wider mix. Absolute return strategies continue to help improve the risk return profile, though not all are equal.
The clash of Titans
The trade negotiations between the United States and China have taken a difficult turn as China backed out of earlier promises leaving the US president looking weak in the eyes of hardline Republicans, a group he considers his voting base. The process of escalation and now de-escalation should take a few weeks. With low growth in the United States and China, we see very decent odds that both presidents head towards a middling trade deal in Q2 or Q3 2020, just in time to have an impact on the US presidential elections. That said, there is still a possibility that the situation gets far worse as either president may want to burnish his credentials as a hard negotiator. This would happen in Q1, far enough away from the election for the shock to growth and equities to dissipate. The deal would likely be focused primarily on agriculture and manufacturing. Gyrations in equity markets around this theme should continue for months to come with Emerging Markets moving the most and offering opportunities as we expect an eventual middling settlement. Yet, the opportunity is more in fixed income than equities.