Global Market Perspective - Q4 2019

The third quarter saw an intensification of the trade wars between the US and China with President Trump increasing tariffs and imposing restrictions on US companies exporting to China. China responded with tariff increases of its own and directed companies to reduce business with the US. At the time of writing the trade talks are ongoing, but the result has been a downgrade to global growth expectations and a significant rally in defensive assets such as sovereign bonds and gold.

Assets which rely on economic activity weakened, but after an initial sell-off equities rallied as central banks eased policy and investors sought interest rate sensitive plays. The focus was on the Federal Reserve (Fed) which cut rates twice during the quarter and the European Central Bank (ECB) which cut rates and restarted asset purchases (quantitative easing, QE). The Bank of Japan (BoJ) also signalled easier policy and consequently, despite the Fed easing, the US dollar continued to attract capital and strengthened during the period. The dollar trend was reinforced by its safe haven status during a period of political uncertainty, an outcome which weighed on emerging markets (EM).

In terms of asset allocation we remain neutral on equity markets and have reduced our exposure to the more cyclical EM. We are long duration, despite low yields, and long gold as a hedge against a weaker growth outcome as flagged by our scenarios.  We continue to seek returns through credit and carry strategies. This quarter our research notes focus on recession risks in the US in 2020 and how investors can respond to heightened geopolitical risk.

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