“Today is the first day of the war with China”
Ray Dalio – July 6, 2018
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 growth remains robust
Outlook and Markets
- Valuations remain stretched, especially in the US
- Trade frictions between the US and the rest of the world, mainly China, increase and threaten growth
- Fed still on track to tighten further but might be forced to change stance due to trade frictions
- Productivity growth continues to be located in emerging markets rather than in developed economies
Main Investment Calls
- Remain cautious and keep a neutral position of the return and income portion in 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 global trade war 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 against the background of weakening employment and confidence numbers
- 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
- 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
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