“I Drove All Night” – Roy Orbison, 1992

Unigestion Adaptive 10

A Global Macro Strategy


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“I Drove All Night” – Roy Orbison, 1992

The last few weeks have seen central banks continue to ease their policy stances in response to tepid global growth and the absence of inflationary pressures. The ECB cut its deposit rate by 0.10% and relaunched their asset purchase programme for “as long as necessary,” while the Fed cut its target rate by 0.25% and indicated that another cut could follow by the end of the year if necessary. The actions were largely in line with investor expectations and the market reaction was relatively muted. With these two key events in the rear-view mirror, can we dream of a long, straight road ahead? Or will investors catch a fever, burning up inside?

What’s Next?

Macro: Central Bank Support Continues

We have communicated for some time our concerns about the Eurozone, with both peripheral countries such as Italy and core countries like Germany approaching recessionary levels. With inflation pressures low, the ECB needed to deliver an aggressive stimulus package in order to kick-start the economy. In some key ways, it did deliver: in addition to the 10bps cut to the deposit rate and a resumption of quantitative easing, its extension of LTRO maturities and the introduction of a two-tier system for reserves should ensure that credit conditions in Europe remain easy.

The ECB’s forward guidance to help the economy “as long as necessary” is a strong commitment from the central bank that monetary policy will remain supportive for some time. This will be important as credit showed signs of tightening broadly according to the Q2 2019 ECB Bank Lending survey (BLS), primarily driven by concerns around the economic outlook and banks’ increased risk aversion. At the same time, the BLS survey pointed to increased demand for credit, from both businesses and households (home purchases as well as consumer credit). The pickup in credit demand was mainly due to the low level of interest rates and spending (on fixed investment for businesses and on durable goods for consumers). This improved credit demand picture needs to be sustained if the ECB wants to avoid ‘pushing on a string’ with its monetary policies.

The Fed faces a different set of challenges: the US economy continues to grow at a decent rate, though at a slower pace than it did in early 2019. However, the uncertainty introduced by trade tensions and the broader global growth slowdown have skewed the risks to the downside. Continuing its policy stance of a mid-cycle adjustment, the Fed cut their target rate by 25bps and their median projection calls for one more cut this year, though that will surely depend on how the economy evolves over the next few months.

Importantly, the inflation forecasts were unchanged while growth was revised higher for 2019 (2.2% from 2.1%) and 2021 (1.9% from 1.8%). Clearly, the Fed acknowledges that growth momentum persists, leading to wide dispersion on the need for further cuts according to the so-called “dot plot.” At this point, the Fed would likely need to see a significant worsening of the US economy to cut rates further. Indeed, both for the Fed and the ECB, there is less consensus among their members, which effectively raises the bar for further easing going forward.

Sentiment: Investors Seem to Continue Their Defensive Stance

Despite a decent macro picture – global growth remains around potential, inflation is nowhere to be seen, and central banks are providing support – investors still appear to be maintaining a fairly cautious view on risky assets. Although no one indicator would be enough on its own, the confluence of multiple perspectives on a cross-asset basis points to the market’s defensive stance:

  • Government bonds remain the most expensive risk premia based on their historical and cross-sectional carry, despite very low or even negative yields;
  • Safe-haven currencies, like the Japanese yen and Swiss franc, remain overvalued;
  • Positioning in gold, whether in ETFs or futures contracts, remains elevated on a historical basis and has not been meaningfully reduced despite the run up in the gold price;
  • The implied equity beta of macro hedge funds and CTAs has moved from strongly positive two months ago to now negative, suggesting these investors have moved net short equities; and
  • The short-term downside skew for equity options remains elevated, with the S&P 500 index seeing levels at around the 80th percentile historically and the Euro Stoxx 50 index at the 90th percentile.

In our view, such defensive positioning would be reasonable today if recession risk was high or there was a significant escalation in the trade war. The former seems unlikely, at least at the global level. And while the latter is a risk that will likely be with us for some time, recent developments have been neutral. This motivates our view that the risks from sentiment are tilted to the upside for growth assets, as investor defensiveness seems overdone. Indeed, we communicated in early September that hedging assets, such as bonds, looked overbought on the back of considerable optimism about central bank easing. The first half of this month has seen that optimism wane. We believe the pain trade remains to the upside for growth assets.

Valuation: Few Opportunities But Clear Risks

Based on carry, most assets are expensive from a historical perspective. However, corporate credit (both investment grade and high yield) stands out as inexpensive from a cross-sectional basis, partly motivating our overweight in credit. And despite rising yields on government bonds, they still remain expensive and a clear valuation risk. Interestingly, equities are roughly neutral, both from a cross-asset carry perspective and traditional equity-specific valuation metrics such as price-to-earnings or price-to-book, especially in emerging markets. Thus, valuations are reinforcing our pro-growth assessment.


Asset Allocation: Risk-on, But Looking to Remain Vigilant

For now, hedging assets seem the most vulnerable to the combination of resilience in economic growth, extreme positioning and tense valuations. We have therefore reduced substantially our exposure to these assets and reallocated to growth-oriented ones, especially credit. Gaining downside protection via options is costly given investor defensiveness and we are instead looking for cost-efficient structures with attractive payoff profiles.




I Drove All Night

Roy Orbison, 1992





Strategy Behaviour

Our medium-term view is currently more constructive, as we are still overweight growth assets and underweight real assets. We are also complementing our exposures with options to protect the portfolio in the case of equity drawdowns.

Performance Review

Over the month of September thus far, the Uni-Global – Cross Asset Navigator fund gained 1.0% versus 3.0% for the MSCI AC World Index and -0.9% for the Barclays Global Aggregate (USD hedged). Year-to-date, the Uni-Global – Cross Asset Navigator has returned 10.3% versus 17.2% for the MSCI AC World index, while the Barclays Global Aggregate (USD hedged) index is up 8.3%.

Unigestion Nowcasting

World Growth Nowcaster

World Growth Nowcaster

World Inflation Nowcaster

World Inflation Nowcaster

Market Stress Nowcaster

Market Stress Nowcaster

Weekly Change

  • Our world Growth Nowcaster remains unchanged, pointing to world growth around potential.
  • Our world Inflation Nowcaster continued to stabilise last week, after a long period of decline.
  • Market stress increased marginally last week as credit spreads widened slightly.

Sources: Unigestion. Bloomberg, as of 23 September 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 23 September 2019.

Unigestion Adaptive 10

A Global Macro Strategy


>> Discover more on our Global Macro Strategy
>> Adaptive Strategy Profile