“THE JOLLY BANKER” – Woody Guthrie, 1940

July saw a continuation of the momentum in macro data and price action observed over the past few months. Economic growth is showing signs of fragile stabilisation, albeit with large divergences within and across regions. Disinflation, however, is more worrisome and has taken centre stage in central bankers’ minds as they now focus on trying to revive tepid growth and extend the economic cycle for as long as possible. Our assessment looks at the world from three different dimensions: macro, sentiment, and valuation. Equally important over the long run, it seems like the recent past has been all about monetary policy as a tool to push the next recession out further, and financial assets reaching new highs as investors thrive, listening to The Jolly Banker.

What’s Next?

Macro: Headwinds fought by the jolly bankers

Without a shadow of a doubt, global economic growth has taken a hit from largely above-potential levels observed in October last year. Since early 2019, our proprietary Growth Nowcaster has indicated a continuous decline, with a stabilisation around potential in March. Fast forward to July, the global level of growth has remained in check with divergences growing in the developed world. The Eurozone, Canada and UK have been showing continued signs of deceleration whereas the US economy has remained stable. It thus came as no surprise that the ECB recently ramped up its accommodative rhetoric to address this worrying situation. On average, the largest detractor remains production expectations, as uncertainty coming from trade tensions weighs on corporate optimism and investment.

Sentiment: Legitimate complacency?

Optimism seemed to be everywhere up until the very last day of July, when the Fed delivered a somewhat “disappointing cut”. Broad measures of market sentiment had been pointing toward a low level of risk aversion and our Market Stress Nowcaster was no exception. The indicator fell back to low levels after a brief pick-up in May: credit spreads kept on tightening in all credit segments, volatility measures receded and liquidity improved as a result of CB easing. So far so good, but one could argue that sentiment was artificially maintained at very high levels by the jolly bankers. Indeed, under normal circumstances (traditional cycle and non-almighty policy makers) decelerating growth and heightened geopolitical tensions would weigh on sentiment, not buoy it.

This is what we have been calling the “bad is good” situation for some time, where complacency becomes “legitimate” as long as the “central bank put” remains alive. Pragmatism remains key in this environment and it required effort not to reduce market exposure at a time when numerous assets have become substantially more expensive. In the meantime, headline risk remained elevated and resurfaced violently late last week on the back of hardening rhetoric between the US and China. The new threat of a 10% tariff on USD 300 Bn of Chinese goods and potential retaliation fears hammered risky assets and complacency in one go.

Finally, “smart money” (CTA and Macro managers) has increased exposure to risky assets recently so the participation in the last leg of the rally has increased. Positioning in growth assets is not “light” any more and could soon become a source of concern as it is now hovering around October 2018 levels: high by historical standards but not yet extreme.

Valuation: Rich, but does it really matter?

This is the usual consequence of monetary policy accommodation: it creates richness – if not bubbles — and exuberance across asset classes. In fact, most risk premia are now flashing red when it comes to valuations. However, relative valuations paint an interesting picture: risky assets (equities and credit) are cheap relative to hedging assets (government and inflation linked bonds, precious metals). As a result, even if it is too early to call for a valuation crush, the expensiveness of hedging assets driven by the jolly bankers could have unpleasant consequences: correlation distortions and diminished protection if, and when, risk appetite reverses.

Markets are currently dismissing the overall valuation factor for a good (or bad) reason. The outcome of such widespread expensiveness does not necessarily have to end in a drama in all risk premia but it would be naive to consider a broad-based multiple expansion as a sustainable environment. Stock valuations have a chance to cool down with a surge in earnings expansion, and credit spreads can keep on tightening as long as recession risk remains muted on the back of central bank action. Nevertheless, certain segments of the fixed income space seem materially over-priced, such as investment grade or government bonds.

Cross asset allocation: Reduced beta, increased carry

The current environment does not require a material and durable risk reduction, yet taking profit from large overweights made sense. As a result, beta reduction can be compensated by relative value opportunities, and our current preference is for credit carry, with a large long/short position in high yield against investment grade. Given the very low level of volatility, we have implemented a number of optional hedging strategies on equity indices to protect in case of an unexpected market shock.

Strategy Behaviour

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

Performance Review

Over the month of July, the Multi Asset Risk Targeted Strategy rose 1.2% versus 0.3% for the MSCI AC World Index and 0.8% for the Barclays Global Aggregate (USD hedged). Year-to-date, the Multi Asset Risk Targeted Strategy has returned 8.4% versus 16.6% for the MSCI AC World index, while the Barclays Global Aggregate (USD hedged) index is up 6.8%.

* 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.