“In a chronically leaking boat, energy devoted to changing vessels is more productive than energy devoted to patching leaks.”
Warren Buffett
Macro Environment
- Inflation pressure in developed markets is subsiding
- European growth loses momentum
- US consumer confidence remain intact while capital markets become more fragile
- Emerging markets growth remains robust while confidence numbers are falling
Outlook and Markets
- Despite recent corrections, valuations remain stretched in a lot of markets
- Trade frictions between the US and China increase and threaten to escalate further
- Fed still on track to tighten further but might be forced to change stance due to trade frictions and the economic cycle turning
Main Investment Calls
- Remain cautious and move to a small overweight in the income portion of the model portfolio
- Maintain an overweight in Cash
- Equities over Sovereign Bonds
- Emerging over Developed Equities
- EMD and Investment Grade Credit over Sovereign Bonds
- TIPS as an (unexpected) inflation hedge
Main Risks
- Full scale trade war between the US and China escalating further also on a political level
- Higher than expected inflation in the US, coupled with substantially increased spending leads to more than the expected rate hikes by the Fed and choke off economic momentum, leading to a possible recession
- Unexpected fallout from a chaotic Brexit could lead to another Euro crisis and put global growth at risk
- Risks of policy missteps as China continues the attempt to rebalance its economy to a more domestically supported one and impose too strict regulatory frameworks on banks
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