“He who wishes to fight must first count the cost”
— Sun Tzu, The Art of War
Macro Environment
- Inflation pressure in developed markets is picking up slightly
- European recovery still intact while dynamics are weakening
- US sentiment & confidence remain intact
- Emerging markets show no signs of growth weakening
Outlook and Markets
- Risks for equity markets increases further as valuations remain stretched, especially in the US
- Volatility spikes remind investors of persistent risks
- Fed still on track to tighten further and might be forced to step in more resolute
- Productivity growth continues to be located in emerging markets rather than in developed economies
- Trade frictions between the US and the rest of the world, mainly China, increase and threaten growth
Main Investment Calls
- Remain cautious and keep a neutral position of the return and income portion in the model portfolio
- Increase cash allocation to overweight
- Equities over Sovereign Bonds
- Emerging over Developed Equities
- EMD and Investment Grade Credit over Sovereign Bonds
- TIPS as an (unexpected) inflation hedge
Main Risks
- Global trade war initiated by tit-for-tat escalation between the US and the rest of the world, mainly China
- As a result, higher inflationary pressure in the US and elsewhere, increasing the need for more resolute centralbank tightening
- Higher than expected inflation in the US, coupled with substantially increased spending leads to more than theexpected rate hikes by the Fed and choke off economic momentum, leading to a possible recession
- Risks of policy missteps as China continues the attempt to rebalance its economy from an unsustainable export-oriented one to a more domestically supported one and impose too strict regulatory frameworks on banks
- The potential for the long-held geopolitical equilibria in the Korean Peninsula and Middle East to be shaken upremains
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