“Pursuit of Happiness” – Kid Cudi featuring MGMT, 2010

Over the last few weeks, many of the risks that have been weighing on investors’ minds, including our own, have shown signs of moderating. A combination of resilient growth, monetary and fiscal policy, and a de-escalation of geopolitical tensions have calmed these headwinds, even if they may not all be tailwinds quite yet. At the same time, investors seem to remain defensively positioned, creating fertile ground for risky assets to outperform should the tailwinds materialise. While we do not believe the risks have dissipated entirely yet, we do believe the risk-reward favours holding risky assets and harvesting carry in investors’ pursuit of happiness.

What’s Next?

Growth Has Shown Resilience and Benefited from Policy Support

We have been communicating for some months now that global macro conditions are modestly supportive for risky assets. Since April of this year, our global Growth Nowcaster has remained steady at around potential levels, indicating that in aggregate the global economy is growing at a decent rate. This rate of growth does not eat into capacity constraints or increase slack in the economy, and is therefore a favourable environment for growth-oriented assets. In previous periods when our Growth Nowcaster was hovering around potential, global equities rose 0.9% on average (in total return terms) over the following month and posted positive returns in 62% of those months. Unsurprisingly, this is in line with their long-term behaviour (0.8% total return with 63% of the months positive). Importantly, there is a recent pickup in growth evident in both developed and emerging economies and our Growth Nowcaster diffusion index – which measures how much data is improving versus declining – points to upward growth momentum.

The weakest components recently have been the “soft data,” or surveys such as purchasing manager indices that are susceptible to dour sentiment due to uncertainty. These are also the first components to shift when uncertainty is reduced. Interestingly, when examining the “hard data,” the picture is more positive. At the end of 2018 and into early 2019, the data suggested the impact from trade uncertainty was flowing through to the real economy, with various measures of global trade worsening. The turn in global monetary policy from tightening to easing has worked reasonably well since then, as it appears to have largely offset the slowdown, though with a lag. Stimulation measures on the part of Chinese policymakers have also helped to support the domestic economy, which is the largest contributor to global growth. The result of this confluence of monetary and fiscal policy has been resilient consumption and supportive financial conditions for the global economy, not the recession some had feared just a few weeks ago.

Monetary Policy is Unlikely to be a Headwind for Some Time

This past week saw the ECB confirm its accommodative policy stance as Mario Draghi’s tenure as President of the ECB comes to an end. While taking over the reins of a globally critical central bank can lead to a change of mind (e.g. Jerome Powell), Christine Lagarde is expected to continue the ECB’s current support when she takes over as President next month. In the US, we expect the Fed to cut interest rates by another 25bps this week when the FOMC meets. The cut is well-priced by the market (90% likelihood) and Fed speakers have given no indication they will not cut, although forthcoming forward guidance could be interpreted as hawkish by the market if it shifts from an accommodative tone to a more patient, data-driven one. Nonetheless, market consensus seems to be coalescing around this week’s probable cut being the last of the “mid-cycle adjustments,” with the odds of additional cuts after this week fading. Thus, while monetary policy many not be the strong tailwind it has been for most of this year, it is also unlikely to turn into a headwind in the near term, as any tightening would require clear signals of a global economic recovery and strong reflation. Moreover, the market does not seem to be overly optimistic about additional monetary support.

Geopolitical Uncertainty Shows Signs of Ebbing

A key reason why policymakers and investors see less need for monetary support is the more positive picture for global trade. In addition to the efficacy of steps already taken by central banks, recent weeks have seen a thawing of relations between the US and China. To be clear, we expect trade uncertainty and broad tension between the world’s two largest economies to continue for some time. However, currently both sides are showing a willingness to make a deal, even if it is unlikely to be a grand bargain. Such an event would be positive for risky assets, as it would reduce to a degree one of the primary sources of uncertainty of the last two years.

One other long-standing source of uncertainty also looks to be closing in on a resolution: Brexit. Last week, the UK Parliament signalled its willingness to get a deal done when it voted for the withdrawal agreement, though the timing of a needed extension has yet to be resolved. Nonetheless, the possibility of a no-deal Brexit or prolonged uncertainty has become much less likely.

The Pain Trade Remains to the Upside

An environment such as the current one, with stable growth, supportive monetary policy and declining uncertainty is fertile ground for risky assets. Investors still seem to be positioned cautiously, with hedging assets and downside protection bid up, suggesting that if there were a market rally, it would be supported by investors shifting back into growth-oriented assets. Collecting carry in this environment is also attractive, as current defensive positioning in the market should keep sell-offs relatively muted. Nonetheless, we are not so naïve as to think that all risks are properly priced by the market, but we prefer to exploit any such mispricing via optional structures or opportunistic trades as our central scenario remains positive.

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 28 October 2019.