Investment Strategy

Six years after the great recession which followed the global financial crisis of 2007-2008, we are about to witness the first timid steps towards monetary policy normalisation by the US Federal Reserve (Fed). The Fed Chair, Janet Yellen, has made her intention to sanction a series of interest rate hikes abundantly clear, provided of course that economic data continue to indicate further improvement in the economy. After a weak start to 2015, we expect the US economy to recover in the second half of the year, thanks to the lagged impact of low energy prices on consumer spending. We anticipate that the first increase will come at the Fed’s September meeting and that rates will be raised gradually thereafter (in small increments, and not at every Fed meeting).

As widely expected, the European Central Bank (ECB) finally launched its version of quantitative easing in early March 2015. This historic decision by the Governing Council, in the face of stern opposition from the Bundesbank and certain other national central banks, can be viewed as a diplomatic triumph for ECB President Mario Draghi. However, we do not believe that investors should see it as a panacea for the eurozone’s economic ills.

Since late June, newspapers have related the unfolding of numerous political and military crises. Russia has been hit by economic sanctions over its involvement in Ukraine, insurgents have gained control of large swathes of Iraq and Syria, tensions have risen in the South China Sea as both China and Japan have become more assertive and, more recently, Scotland came close to breaking up the United Kingdom after over three centuries of union.

Since late June, newspapers have related the unfolding of numerous political and military crises. Russia has been hit by economic sanctions over its involvement in Ukraine, insurgents have gained control of large swathes of Iraq and Syria, tensions have risen in the South China Sea as both China and Japan have become more assertive and, more recently, Scotland came close to breaking up the United Kingdom after over three centuries of union.

The first half of the year has been quite unusual for investors. Global equity markets have risen towards all-time highs, while bond markets have also registered solid positive returns. Traditionally, investors expect improving growth to feed into higher inflation and to push bond yields up.

At the beginning of the year, investors in advanced economies acted on perceptions of a favourable growth outlook and accommodative monetary policy. Unfortunately, the upbeat sentiment has been suddenly hit by weaker-than-expected data in the US and China. Data revealing disappointing job growth in the United States, coupled with a sell-off of emerging market (EM) assets and the recent standoff between Russia and Ukraine, led to a drop in stock prices and a rise in equity market volatility. At the same time, US Treasury and 10-year core sovereign bond yields in the eurozone dropped, as did sovereign yields in the euro area periphery, where investor sentiment has been improving. In this bumpy beginning of the year, gold has been the best performer, recouping one-third of last yearӳ losses. Although we remain convinced that the global economic outlook is clearly on a growth path, and we see potential for risky assets to resume positive performances in Q2, we want to hedge potential risks coming with the spring season (i.e. weak earnings releases, further economic sanctions against Russia). Therefore, we tend to diversify our asset allocation, reducing our Overweight stance on US equities initiated back in 2012 and temporarily bringing our position on euro Investment Grade corporate bonds to Neutral from Underweight.

Most asset prices could shift upward given current extraordinary conditions, but this is not a guarantee of extraordinary long-term returns