Investment Perspectives 2018 | Mid-Year Review & Outlook

Executive Summary

In this mid-year publication, we review our January expectations and analyse some current key economic indicators before outlining the asset allocation that we recommend for the second half of the year.


Our early-year portfolio positioning was cautious

Our portfolio positioning at the beginning of 2018 was somewhat cautious, with an above-average level of cash and a modest overweight exposure to the equity asset class. We contended that 2018 would be a more challenging year for equities and this has greatly proven to be the case. Our expectation that bond yields would gradually rise has been vindicated in the case of U.S. Treasuries, but not for core European bonds.

We refrained from deploying any cash towards equities during the spectacular January rally as we felt that markets had become overbought and investors too bullish. With traditional assets struggling to produce positive returns in the current unstable market conditions, the role of alternative strategies has taken on more importance, as a source of uncorrelated performance and to strengthen the resilience of portfolios.


Global growth has levelled off, in Europe in particular

Global growth has eased during the first half but still remains solid. The widely expected extension of the broad and strong global economic trends observed throughout 2017 has not quite materialized as manufacturing and trade growth have shown some signs of moderation. A slowdown of economic growth has taken place in Europe, in Japan and even in the United States. The combination of financial market stress, escalating trade tensions and political issues has dented elevated levels of optimism and clouded the economic outlook. Compared to 2017, the radical agenda of Donald Trump is proving to be increasingly disruptive. Looking ahead, the U.S. economy is picking up steam thanks to a strong job market, robust consumer spending and the help of tax reform. In contrast, the Eurozone will be hoping for an improvement on its first half performance; a weaker euro should provide some help for exports, especially if the global trade dispute were to be resolved quickly in a positive manner.

The ECB remains cautious

The confidence of the Federal Reserve in outlining its monetary policy contrasts with the ever cautious communication of the European Central Bank. The Fed has already raised its benchmark interest rate twice this year and has indicated it should hike rates again during both of the remaining quarters. The central bank has also started to shrink the size of its balance sheet by some $ 150 billion to around $ 4.3 trillion. As expected, the European Central Bank announced that it will be ending its asset purchase programme completely at the end of the year. However, the news that interest rates would stay unchanged at least through next summer came as a shock and weakened the euro significantly. In a context of softer economic activity in Europe and the threat of a global trade war, the ECB clearly appears to be talking down the euro as a mean of offering support to the region’s economy.

We have a modest overweight allocation in equities

The current environment of sustainable growth and the positive outlook for earnings remain supportive for equities despite the headwinds represented by higher bond yields and concerns over tariffs on goods. We continue to hold
an overweight exposure in equities with a well-diversified regional exposure. We also believe that the portfolios need to have diversification due to the challenging and ever-changing market conditions. The time when all assets were lifted by the provision of abundant liquidity and ultra-low interest rates is behind us and markets have become more discerning. That is why we have added exposures to alternative strategies in order to further spread portfolio risk and to be able to rely on a wider range of performance sources.

In the next section of the document, we will evaluate the macro environment and the prevailing financial conditions by highlighting several key indicators that we observe. Following a brief overview of the first half returns of the different asset classes, we will outline our current market outlook and asset allocation.


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