“A government that robs Peter to pay Paul can always depend on the support of Paul” – George Bernard Shaw (1856-1950)

“A government that robs Peter to pay Paul can always depend on the support of Paul” – George Bernard Shaw (1856-1950)

Tumbling interest rates and manufacturing recession

Bond yields continued to drop into unexplored territory, many of them in negative territory (German 10-year Bund now at -0.7%). The US yield curve is also dropping fast with a risk of an inversed bias (2-year bond at 1.55 vs 1.59 for the 10 year), usually indicating a forthcom- ing recession. Bond markets are anticipating trouble and the debate continues: will central banks save investors once again and can they keep things under control? The Fed will surely drop rates by at least 25 basis points later this week but other regions and notably Europe do not have the same options with their rates being at zero for the last decade. It seems like further digging into negative territory will not have any impact on investments nor consumption and purchase plans continue to artificially twist traditional risk models (where is the risk premium on Greek bonds yielding 1%?).

We are concerned about this financial environment lacking any kind of risk-free yield and will continue to minimize allocation to Financials and Long duration (even tough, there seems to be no limit to how low negative rates can reach).
Germany continues to struggle (industrial new orders were down 5% in July) potentially opening the door for an unprecedent German Keynesian stimulus package?

Sectorial rotation: cyclicals are (temporarily?) back

Despite the current gloomy environment and depressed sentiments, we continue to favour a consistent exposure to Equities. We feel, one needs to be contrarian (the amount of cash in institutional portfolios has reached historical highs) and unfortunately there is probably nowhere else to allocate if you want to get returns. This being said, we continue to allocate approx. 15 to 20% into long/short strategies allowing to reduce volatility.

August showed brilliant Bond returns (The Barclays Pan Eur Agg up more than 2% and + 9% YTD!). But Equity indices showed some resilience with corrections between 1 to 3%, keeping healthy YTD performances. Aulien dropped 60 basis points and is up 4% YTD.
We took the opportunity of some corrections to increase some positions like Axa, Leo Vegas, Elekta and Enea. Some of our cheap cyclical stocks (Boliden, a copper mining company and Stora Enso, Pulp and paper) have strongly rebounded in the last few days; is Doctor copper anticipating better days?

Our current favourite picks are, Elekta, Axa and Leo Vegas.

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