July 2018 Investment Monthly
- We remain overweight global equities and local-currency emerging market (EM) government bonds. We also retain our underweight stance on developed market (DM) government bonds, and global investment grade (IG) and high-yield (HY) corporate bonds
- Global equity markets edged lower in June, as risk appetite continued to be hit by escalating US-China trade tensions. More generally, EM assets underperformed
- The Fed raised rates at their June policy meeting. The new interest rate projection points to two more hikes for 2018, and a total of three hikes in 2019
- The European Central Bank (ECB) announced its intention to stop its net bond-buying programme by the end of this year
- Chinese economic growth appears to have remained solid in Q2. Nevertheless, policies are turning more proactive in supporting domestic demand
- In Japan, CPI inflation is likely to remain below target in the near term, and therefore no significant shift in monetary policy from the Bank of Japan is expected
A tougher environment for investors in 2018
Market performance in 2018 has been poor. This has come as rising US inflation has exacerbated concerns over tightening Fed policy, pushing US Treasury (UST) yields higher. Meanwhile, DM activity growth lost momentum at the start of the year just as rising political uncertainty (eg Italy) and global trade tensions came to the fore. Amid a stronger US dollar, this has helped fuel anxieties over many exposed EMs.
The outlook around global trade policy is very unclear, with the risk of a further escalation in tensions. Positively, however, measures announced thus far should have a small economic impact. For the time being, global growth remains robust and we think the risk of recession is very low. We therefore maintain our pro-risk positions in multi-asset portfolios, with a preference for global equities and EM assets which offer us the best risk-adjusted prospective returns, in our view. We also maintain our underweight positioning in DM government bonds, which continue to offer low sustainable returns and find themselves in an unfavourable environment (building cyclical inflation and central bank policy tightening). However, we think the relative attractiveness of USTs has improved amid higher yields. Finally, corporate bond valuations still offer us a slim margin of safety against negative shocks, consistent with an underweight positioning in portfolios.