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Global Markets Overview – July 2019

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July 26, 2019

In July’s edition of the Global Markets Overview, we track recent price action and discuss our outlook for alternative beta.

In this month’s Global Markets Overview:

  • We characterize alternative beta as strategies that invest in diversifying markets and well-understood long-short investment strategies to capture a return for taking risk or due to structural or behavioral effects. The strategies are – by and large – implemented in a rules based manner.
  • There are several reasons why assessing medium-term attractiveness for alternative beta strategies is challenging: Concepts such as yield, growth, and valuation are less clear cut or non-existent for many strategies and alternative beta strategies are designed to have low exposure to macro-economic variables, making them less amenable to the analysis typically used in traditional markets.
  • For these reasons we recommend that investors maintain a broad set of strategies, with medium term views tempered by these factors.

Monthly overview

  • US and China agreed to resume trade negotiations at the G20 summit held at the end of June. President Trump announced that he will not place any more tariffs on Chinese goods whilst the discussions are in progress and President Xi agreed to purchase additional US agricultural goods. The US also relaxed some sanctions placed on Huawei and allowed US companies to sell to Huawei if certain criteria are met.
  • The Federal Reserve’s forward guidance has become more dovish, emphasising downside risks to growth and the building case for a rate cut before the end of the year.  We are keeping track of economic data to determine the likelihood of a rate cut although note that falls in bond yields so far this year, bring them more into line with our cautious view.
  • The Reserve Bank of Australia has lowered cash rates by another 25bps to historic lows of 1%. This move comes as authorities introduce a range of fiscal and monetary stimulus measures to stave off rising downside risks in the economy - we have already seen a rate cut of 25bps in June and an income tax cut package worth $106bn. The Central bank noted: i) uncertainty generated by trade and technology disputes negatively impacting investment; ii) house price declines and; iii) subdued consumption growth due to a protracted period of low income growth.
  • Both the European Central Bank (ECB) and the Bank of Japan (BoJ) have stated that they are ready to ramp up monetary stimulus in response to growing downside risks and rising uncertainty. Both banks have stated that they will consider issuing new forward guidance, resuming some form of quantitative easing and deepening negative interest rates if a deteriorating growth outlook hurts inflation prospects. We continue to monitor the situation in both economies.

Our Five-Year Outlook

In January, we published our Five-Year Outlook. A summary of this is provided below:

  • First, we expect a material slowdown in growth in most of the major economies in 2019, with downside risks rising as we move into 2020.
  • The main driver of weaker conditions is the gradual tightening of financial conditions, as the major central banks have raised interest rates and/or withdrawn money from the financial system.
  • We believe that a recession in one or more of the major economic regions is likely over the next three years – a more cautious view than in 2018.
  • Second, relative to our medium-term outlook, we think valuations for growth-related assets are still high and expect low returns on average over five years, …
  • … putting pressure on savers’ wider financial positions.
  • Third, achieving investment return targets – and hence meeting savers’ expectations – is going to be difficult in this environment in our view, even over longer time periods.

Five portfolio priorities for a surprise-free 2019/2020

  • Diversify
  • Reduce unrewarded risks
  • Macro & dynamism
  • Innovate through alpha
  • Innovate to find diversity, e.g., China now offers a new and diversifying set of assets for investors
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