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Wednesday 14 August 2019
Glass Half-Full, Thanks To Central Banks
Markets are flirting with new highs on expectations that central banks will step into to avoid excessive deterioration of the economic outlook, in the absence of any material sign of inflation. The overall narrative in the market is that the glass is half full and central banks will seek to extend the current economic cycle.
Although we do not see an imminent recession and believe economic growth will moderate, the quality of growth is expected to be subdued, However, domestic household demand remains resilient and would be tested by the spillover from the trade weakness.
Central banks'dovish monetary policy stance will allow them to keep interest rates low, leading investors to look for attractive assets such as Investment Grade credit and Emerging Market debt. At the same time, we expect the Fed to deliver a preventive rate cut, but not to overreact.
Developed Market equities extended the rally and we now see that most of the good news are already priced-in. We expect some volatility and consolidation in Developed Market equities in the short term, with thin volumes and approaching earnings season. As a result, selectivity will be key to maximising returns. On the other hand, Emerging MArket equities have benefited from easing trade tensions.
Recent price movements suggest that a balanced approach to investing is crucial in this phase of the cycle. We adopt a diversified approach with a positive stance on credit, Emerging Market debt and US bonds, as well as a cautious stance on Developed Market equities.
Investors should be watchful of any pullbacks and take advantage of the volatility by adding to the most convincing ideas in Emerging Markets, Investment Grade credit, and high-quality stocks. From a policy perspective, a convergence of pro-growth fiscal and monetary measures could prolong the Goldilocks phase1 for risk assets.
Revisiting fixed income opportunities after the European institution appointments
Financial markets have been enjoying a record-breaking run of late.
The journey from market complacency to awareness of fragilities is in full swing, and the market correction in May is part of that, as is the recent recovery fuelled by dovish Central Banks (CB). Aware investors should recognise that the late cycle phase and mature market trends require improving fundamentals and positive political events to deliver sustainable uptrends in risk assets. But, it is difficult to see such improvements happening in the short term.