“Daydreamer” – David Cassidy, 1973

Over the year so far, 16 central banks have eased for a total of 23 moves and a cumulative 1,060 basis points. Understandably, macro data, except inflation, did not get a lot of attention as most investors are convinced that central banks will successfully re-stimulate the economy as they did during the late ‘90s pre-emptive easing cycles. The market’s preoccupation with interest rates has been notable for some time, leading investors to read bad news as good news and vice versa. Interest rates have been the main driver of almost all asset classes and the steady “everything rally” forced even highly risk-averse investors up the risk ladder into more crowded positions. The trade talks between China and the US ended on a “constructive” note and the next round of talks were scheduled for September. The Fed meeting passed and implied volatilities were pricing a quiet summer. Sentiment was upbeat, valuations were mostly irrelevant… until the daydreamers were woken up by a tweet.

What’s Next?

Game of chicken

Market expectations were high going into the long-awaited Fed July meeting, so it proved tough to deliver a dovish surprise. Donald Trump made no secret of the fact that he was not happy with Jerome Powell’s decision, and shortly thereafter, he increased the pressure on China by taxing essentially all Chinese imports. Is the US president convinced that he has discovered a free lunch? The Fed has remained politically independent so far, but Trump seems very confident that central bankers will react to changing economic and financial conditions. In his view, he will be able to bash the Fed and China, which appears to be popular with voters, without paying the price for it.

However, the White House’s high-stake game of chicken with China and the Fed could have serious consequences. Trump will probably succeed in pressuring the Fed, as the risk of recession would be too high to face if it backfired. However, comments like “we will be taxing the hell out of China” will not work, as the Politburo is fully aware that a trade war-induced recession would greatly reduce the probability of Trump’s re-election. By contrast, the Chinese president, Xi Jinping, does not have to think in election cycles and therefore time seems to be ticking in his favour.

Is the US consumer immune to tariffs?

Our US proprietary macro Nowcasters show a similar picture as during the 1995-1998 period: decent levels of growth with falling inflation. However, the backdrop is more challenging this time. During the late nineties, emerging markets were suffering from a currency crisis, but developed countries were in a much better situation than they are currently. Over the past months, the global business cycle has decelerated noticeably and global trade has been hit hard by the trade war. Open, export-oriented countries like Germany are caught in the crossfire. German industrial production in June saw its largest fall in almost a decade and business expectations have fallen below the levels seen during the last European recession.

Liquidity is a coward; it disappears at the first sign of trouble

The market was very nervous going into the Fed meeting as most of the systematic strategies had increased exposure to risky assets and even the most defensive discretionary investors were forced up the risk ladder due to the steady “everything rally”. There was some kind of a relief, despite a disappointing cut, after the Fed meeting had passed. The S&P 500 index was about to retest its highs and complacent investors were about to fall back into daydreaming. But then President Trump’s tweet hit the market. Over the next three days, the major US indices dropped over 8% on an intraday basis and the VIX spiked to 24.8, driven by the threat of tariff increases. However, the market shock seemed to be short lived and complacency and confidence were back almost as fast as they had disappeared. If a tweet can provoke such an overshoot in the most liquid instruments, it will be interesting to see how illiquid, crowded passive instruments will absorb a market shock that lasts longer than three days.

Valuations do not matter until they do

The dovish Fed pivot has clearly driven the equity market rally in 2019. More than 90% of the gains in the S&P 500 index have been driven by valuation expansions, as earnings growth expectations weakened but the market priced in central bank cuts. The market consensus is that the move lower in rates is supportive for equities, justifying above-average valuations going forward. But shouldn’t lower yields also be a reflection of weaker growth?

Even if sales can grow moderately during low growth, profit margins are likely to remain under pressure from wage growth, supply chain disruption, rising input costs and slowing capex due to the trade war. The earnings cycle remains crucial for equity markets, and while central banks are starting to loosen their monetary policy to reflate the economy, we doubt this will be enough to save current expectations of double-digit EPS growth for 2020 and 2021.

Cross asset allocation: cautious and dynamic

We see a low recession risk probability, coupled with increased odds of negative inflation surprises. Therefore, central banks will have enough flexibility to pump even more liquidity into the system, which favours carry strategies.

Markets are clearly on-edge regarding trade, but equally willing to “buy the dip”. Accordingly, sentiment and valuation have made a comeback, leading to a reduction of our overall market exposure. We keep on protecting tail risk via convex option strategies

Strategy Behaviour

Our medium-term views remain cautious, and we prefer to get exposure to growth via high yield corporate credit. We are also complementing our modest equity exposure with options to protect the portfolio in the case of equity drawdowns.

Performance Review

Over the month of August thus far, the Multi Asset Risk Targeted Strategy is down 0.6% versus a 2.7% fall for the MSCI AC World Index, while the Barclays Global Aggregate (USD hedged) is up 1.0%. Year-to-date, the Multi Asset Risk Targeted Strategy has returned 7.7% versus 13.5% for the MSCI AC World index and 8.0% for the Barclays Global Aggregate (USD hedged) index.

* The Multi Asset Risk Targeted Strategy performance is shown in USD net of fees for the representative account of the Multi Asset Risk Targeted (Medium) USD Composite and reflects the deduction of advisory fees and brokerage commission and the reinvestment of all dividends and earnings. Past performance is not indicative of future performance. This information is presented as supplemental information only and complements the GIPS compliant presentation provided on the following page.

Unigestion Nowcasting

Important Information

Past performance is no guide to the future, the value of investments can fall as well as rise, there is no guarantee that your initial investment will be returned. This document has been prepared for your information only and must not be distributed, published, reproduced or disclosed by recipients to any other person. This is a promotional statement of our investment philosophy and services only in relation to the subject matter of this presentation. It constitutes neither investment advice nor recommendation. This document represents no offer, solicitation or suggestion of suitability to subscribe in the investment vehicles it refers to. Please contact your professional adviser/consultant before making an investment decision. Where possible we aim to disclose the material risks pertinent to this document, and as such these should be noted on the individual document pages. Please contact Unigestion for a complete list of all the applicable risks. Some of the investment strategies described or alluded to herein may be construed as high risk and not readily realisable investments, which may experience substantial and sudden losses including total loss of investment. These are not suitable for all types of investors. To the extent that this report contains statements about the future, such statements are forward-looking and subject to a number of risks and uncertainties, including, but not limited to, the impact of competitive products, market acceptance risks and other risks. As such, forward looking statements should not be relied upon for future returns. Data and graphical information herein are for information only and may have been derived from third party sources. Unigestion takes reasonable steps to verify, but does not guarantee, the accuracy and completeness of this information. As a result, no representation or warranty, expressed or implied, is or will be made by Unigestion in this respect and no responsibility or liability is or will be accepted. All information provided here is subject to change without notice. It should only be considered current as of the date of publication without regard to the date on which you may access the information. Rates of exchange may cause the value of investments to go up or down. An investment with Unigestion, like all investments, contains risks, including total loss for the investor.

This information is issued by Unigestion (UK) Ltd (“Unigestion”), which is authorised and regulated by the UK Financial Conduct Authority (“FCA”). Unigestion is also registered as an investment adviser with the U.S. Securities and Exchange Commission (“SEC”). This information is intended only for professional clients, institutional clients and eligible counterparties, as defined by the FCA, and qualified purchasers as defined by the SEC and has therefore not been adapted to retail clients.

Unigestion Multi Asset Risk-Targeted (USD): 31 December 2014 to 30 June 2019

1: This year is incomplete, it stops in June.

Special Disclosure: For presentations prior to 31.03.2018 the strategy was measured against the LIBOR 3M USD + 4%. Beginning April 2018 the firm determined that the benchmark did not accurately reflect the strategy mandate and the benchmark was removed. Definition of the Firm: For the purposes of applying the GIPS Standards, the firm is defined as Unigestion. Unigestion is responsible for managing assets on the behalf of institutional investors. Unigestion invests in several strategies for institutional clients: Equities, Hedge Funds, Private Assets and the solutions designed for the clients of our Cross Asset Solution department. The GIPS firm definition excludes the Fixed Income Strategy Funds, which started in January 2001 and closed in April 2008, and the accounts managed for private clients. Unigestion defines the private clients as High Net Worth Families and Individual investors. Policies: Unigestion policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Composite Description: The Multi Risk Targeted (Medium) composite was defined on 15 December 2014. It consists of accounts which aim to deliver consistent smooth returns of cash + 5% gross of fees across all market conditions over a 3-year rolling period. It seeks to achieve this by capturing the upside during bull markets while protecting capital during market downturns. Benchmark: Because the composites strategy is absolute return and investments are permitted in all asset classes, no benchmark can reflect this strategy accurately. Fees: Returns are presented gross of management fees, administrative fees but net of all trading costs and withholding taxes. The maximum management fee schedule is 1.2% per annum. Net returns are net of model fees and are derived by deducting the highest applicable fee rate in effect for the respective time period from the gross returns each month. List of Composites: A list of all composite descriptions is available upon request. Minimum Account Size: The minimum account size for this composite is 5’000’000.- USD. Valuation: Valuations are computed in US dollars (USD). Performance results are reported in US dollars (USD). Internal Dispersion & 3YR Standard Deviation: The annual composite dispersion presented is an asset-weighted standard deviation calculated for the accounts in the composite the entire year. When internal dispersion is not presented it is as a result of an insufficient number of portfolios in the composite for the entire year. When the 3 Year Standard Deviation is not presented it is as a result of an insufficient period of time. Compliance Statement Unigestion claims compliance with the Global Investment Performance Standards(GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Unigestion has been independently verified for the periods 1 January 2003 to 31 December 2016. The verification report(s) is/are available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and(2) the firms policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation.