Monthly management comment
Wobbling confidence and shaky markets.
Global indicators are showing an economical slowdown but so far, no recession. If manufactural climate remains sluggish, consumption and services are still very resilient. Central banks are once again on easing path in order to maximise the current expansion and try to minimise markets corrections. The US Fed, as expected, dropped by 25 basis points the repo rate early in the month and called it a “mid cycle adjustment “, but we feel more powder will be needed to extend this unusually long cycle.
The everlasting us/china trade dispute is taking its toll on both countries growth and balance sheets but is also spilling on to other geographical areas. Trump is turning the heat on Europeans by initiating tariffs on various products and companies such as Airbus. Protectionism is probably here to stay and it will not help an eventual recovery. Nevertheless, a truce, if not peace, will probably make sense in the forthcoming weeks as all parties are in need of some relief.
There are plenty of obstacles before this year can reach a positive conclusion: Brexit, renewed tensions in the middle East, PMI contractions, and the 4-quarter earning season.
End of 2019 similar to 2018? Better be safe than sorry.
The YTD positive performances were mainly achieved early in the year. Most Equity markets are showing double digit gains and Bonds are not far behind. With the previously mentioned deteriorating climate, we feel it will be challenging for them to keep these gains in the forthcoming trimester. We are concerned by the recent US repo troubles needing huge liquidity injections, a possible symptom of stress in the financial system. The Earning season will start in a few days and it will be hard to satisfy some rather optimistic expectations. We have therefore reduced our risk exposure by selling Tomra (the uptrend was broken), Veoneer (stop loss), Hermes (luxury sales are suffering particularly in Hong Kong), Ali Baba (Government intervention is never good news) and Templeton Emerging markets (bad performance of the fund and volatiles asset to hold in turmoil).
Even though we show a quite cautious stance towards many investments, we don’t foresee a large contraction or recession but anticipate a readjustment of current valuations and risk ratios. We have bought some shares in Axa (buying opportunity after a correction), Enea (a long- term bet on 5G technologies and Lundin Petroleum (on the back of renewed geopolitical tensions in the Middle East). We are ready to reallocate cash into equities swiftly as there will surely arise opportunities. Despite currents clouds, there are still plenty of good reasons to invest in shares (Attractive yields vs Bonds and Cash, possible stimulating monetary policies, a lot of cash on the sideline) specially shares in companies with tangible assets and sound balances sheets.
Our current favourite picks are Lundin Petroleum, Quantex Gold Fund and Essity.