October began in the shadow of highly negative expectations but ended on a positive note, as key dangers were avoided. At the start of the month, fears of recession were making headlines, expectations of central bank action were high while geopolitical stress was elevated due to Brexit and trade war tensions. In addition, US corporate earnings for Q3 were released in the face of growing pessimism. However, these pockets of risk have since receded, feeding the bulls with fresh vitamins to prepare for the cold months ahead. Both risky and hedging assets have enjoyed the ride but rotation, dispersion, and correlation distortions have started to appear in numerous asset classes, leaving us with questions to answer. Will this trend continue, which assets will end up flying to the moon, and how can we position ourselves for the final 40 trading days of the year? Economic conditions have continued to stabilise and consolidate around potential levels in October, with the number of improving data prints increasing through the month. Our proprietary Growth Nowcaster indicates that global economic activity is growing moderately but far from recessionary levels. We have observed this stabilisation for more than six months now without any signs of deterioration, both in developed and emerging countries, and we remain comfortable with the quality of the signal. Our assessment has been validated recently with a higher-than-expected US quarterly GDP at a 1.9% annualised growth rate, broadly unchanged versus Q2. Naysayers will argue that the breakdown is worrying given that only consumer-based measures contributed positively, while other components were more muted. The weakness in investment can be attributed to an escalation in trade tensions over the summer. If true, any improvement on that front will have a positive impact on soft data and capex, which could push growth above 2% in the near term. The consumer is therefore getting most of the attention these days and as long as employment data remains firm, the long-lasting effects of a benign job market will continue to be favourable for growth. Elsewhere, early signs of improvement are a source of hope in Europe, particularly France and Italy, while China shows signs of strengthening from below-potential levels. October also saw another round of hotly anticipated central bank meetings. The Fed, ECB, BoJ and others adjusted their monetary policy stances, and largely delivered on investors’ expectations to keep monetary support alive for longer. Ample accommodation remains in place to sustain growth and revive inflation, which remains the missing part in the equation. Mario Draghi left the ECB against a mixed backdrop with both growth and inflation undershooting the bank’s target, but having avoided a major systemic breakdown and recession. Fed President Jerome Powell very recently delivered the third and possibly last of his so-called “mid-cycle adjustment” rate cuts. He and his fellow FOMC colleagues contend with acceptable economic growth and sound employment data on one hand and undershooting inflation, industrial slowdown and trade risks on the other. We consider that central banks have adjusted their policies pragmatically, achieved their goals, and will now need to observe the effects of monetary support over the quarters to come. Looking forward, we do not expect headwinds from policy makers, who should maintain their accommodative stances unless they start posing risks of overheating economic activity, or inflation. The latter is still nowhere to be seen and represents another positive for risk-taking. Concerns around Brexit, trade, Middle East tensions and Q3 earnings have all waned over the course of the month, improving market sentiment. The great wall of worry has disappeared and paved the way for gradual increases in risk appetite throughout October. Odds of a hard Brexit have substantially diminished, although election risks will now take centre stage. Trade tensions between the US and China subsided as well, with both parties finally showing the will to compromise. Skies have cleared on the micro front too. More than 80% of S&P 500 companies that have reported Q3 results thus far have beaten earnings expectations. In Europe, 61% of Stoxx 600 earnings are better than expected, an improvement from previous quarters in spite of absolute negative earnings growth. Owing to strong initial pessimism, companies beating expectations were better rewarded than poorer performing ones were punished. Altogether, global stock indices reached new all-time highs in October, with a return of +2.7% for the MSCI All Country and more than +20% year to date. Meanwhile, the Volatility Index (VIX) dropped from 20% early in the month to 13% on October 31st. Hedging assets (government bonds) weakened accordingly: 10-year treasury yields rose to three-month highs of 1.86%, while broad sovereign indices lost 0.45% in total return terms, ending lower for the second month in a row. Under the surface however, rotation and correlation distortions have been at work for a couple of months and these will have to be monitored closely to optimise allocation decisions and avoid being caught in unwanted style reversals. Lately, the rise in real yields has finally started to trigger outperformance in value and high dividend stocks versus growth and momentum styles, which had massively outperformed earlier in the year. The same applies to emerging stock indices, which outperformed their developed peers, posting 4.18% and 2.8% respectively. The quest for increased carry, improvements in macroeconomic and geopolitical conditions and a weakening US dollar helped buoy emerging assets. In contrast, low volatility equity strategies suffered from the repricing in duration and the surge in risk appetite, while high yield credit undershot its historical beta to stock indices as rich valuations and extreme crowding weighed on demand for the asset class.“Fly Me to The Moon” – Frank Sinatra, 1954
What’s Next?
Economic Growth Revives…
… Thanks to Central Bank Action
Sentiment has Improved, Rotation and Dispersion Matter
The combination of tepid but improving growth, low inflation, supportive central banks and decreasing risks creates, in our opinion, a very favourable environment to maintain higher exposures to growth-related asset classes while seeking carry opportunities. However, given style rotations and correlation distortions, our preference within risky assets goes to equities and selective portions of the credit and volatility universes. In contrast, supportive central bank policies and lower recession risk pricing lead us to underweight government and inflation-related securities. Within the equity space, we still consider emerging market assets as a potential outperformer while we see current dividend growth pessimism as an opportunity, which we implement on an opportunistic basis.Asset Allocation Going Into Year End
Fly Me to The Moon
Our medium-term view is currently constructive: we are still overweight growth assets and underweight real assets. Given the current cost of hedging, we are using forex based strategies exposures to hedge ourselves against adverse market conditions. For the month of October, the Uni-Global – Cross Asset Navigator fund was flat versus a 2.7% return for the MSCI AC World Index and a -0.2% return for the Barclays Global Aggregate (USD hedged). Year-to-date, the Uni-Global – Cross Asset Navigator has returned 10.2% versus 19.4% for the MSCI AC World index, while the Barclays Global Aggregate (USD hedged) index is up 8.6%.Strategy Behaviour
Performance Review
Unigestion Nowcasting
World Growth Nowcaster
World Inflation Nowcaster
Market Stress Nowcaster
Weekly Change
- Our world Growth Nowcaster remained unchanged this week, as both emerging and developed economies showed further signs of stabilisation.
- Our world Inflation Nowcaster stabilised as its diffusion index surged to 50% levels from lows.
- Market stress decreased, driven by all its components.
Sources: Unigestion. Bloomberg, as of 04 November 2019.
Navigator Fund Performance
| Performance, net of fees | 2018 | 2017 | 2016 | 2015 |
| Navigator (inception 15 December 2014) | -3.6% | 10.6% | 4.4% | -2.2% |
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.
Important Information
Past performance is no guide to the future, the value of investments, and the income from them change frequently, may 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. It is neither directed to, nor intended for distribution or use by, any person or entity who is a citizen or resident of, or domiciled or located in, any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. 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 to which it refers. Any such offer to sell or solicitation of an offer to purchase shall be made only by formal offering documents, which include, among others, a confidential offering memorandum, limited partnership agreement (if applicable), investment management agreement (if applicable), operating agreement (if applicable), and related subscription documents (if applicable). 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. The views expressed in this document do not purport to be a complete description of the securities, markets and developments referred to in it. Reference to specific securities should not be considered a recommendation to buy or sell. Investors shall conduct their own analysis of the risks (including any legal, regulatory, tax or other consequences) associated with an investment and should seek independent professional advice. 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. Actual results could differ materially from those in the forward-looking statements. As such, forward looking statements should not be relied upon for future returns. Targeted returns reflect subjective determinations by Unigestion based on a variety of factors, including, among others, internal modeling, investment strategy, prior performance of similar products (if any), volatility measures, risk tolerance and market conditions. Targeted returns are not intended to be actual performance and should not be relied upon as an indication of actual or future performance.
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.
Uni-Global – Cross Asset Navigator is a compartment of the Luxembourg Uni-Global SICAV Part I, UCITS IV compliant. This compartment is currently authorised for distribution in Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Norway, Spain, UK, Sweden, and Switzerland. In Italy, this compartment can be offered only to qualified investors within the meaning of art.100 D. Leg. 58/1998. Its shares may not be offered or distributed in any country where such offer or distribution would be prohibited by law.
No prospectus has been filed with a Canadian securities regulatory authority to qualify the distribution of units of these funds and no such authority has expressed an opinion about these securities. Accordingly, their units may not be offered or distributed in Canada except to permitted clients who benefit from an exemption from the requirement to deliver a prospectus under securities legislation and where such offer or distribution would be prohibited by law. All investors must obtain and carefully read the applicable offering memorandum which contains additional information needed to evaluate the potential investment and provides important disclosures regarding risks, fees and expenses.
All investors must obtain and carefully read the prospectus which contains additional information needed to evaluate the potential investment and provides important disclosures regarding risks, fees and expenses. Unless otherwise stated performance is shown net of fees in USD and does not include the commission and fees charged at the time of subscribing for or redeeming shares.
Unigestion UK, which is authorised and regulated by the UK Financial Conduct Authority, has issued this document. Unigestion SA authorised and regulated by the Swiss FINMA. Unigestion Asset Management (France) S.A. authorised and regulated by the French Autorité des Marchés Financiers. Unigestion Asia Pte Limited authorised and regulated by the Monetary Authority of Singapore. Performance source: Unigestion, Bloomberg, Morningstar. Performance is shown on an annualised basis unless otherwise stated and is based on Uni Global – Cross Asset Navigator RA-USD net of fees with data from 15 December 2014 to 4 November 2019.
