Global CIO video: More defensive, but not down
After a bumpy ride in May, June has brought some relief for investors. We look at the latest developments and how we are positioned.
After trade worries turned May into a bumpy ride that saw risk assets correct sharply, early June brought some relief. Equities managed to recover most of their May losses in the first few days of the month.
Though US-China trade relations remain frayed and a trade deal has yet to materialize, the fact that the USA did not impose tariffs on Mexico helped calm investors' nerves. Nevertheless, concerns about the impact of the trade war on economic growth linger. We now expect the US Federal Reserve (Fed) to make an "insurance" interest rate cut in July to offset slowing momentum.
Risk reduced, look for growth
Nevertheless, we do not forecast the end of the current expansion and keep our view that assets geared to growth such as equities or high yield bonds will continue to generate positive returns. Yet in light of the risk that trade-related uncertainties may hamper growth, we have reduced the level of risk in our investment strategy. After solid gains this year, we have neutralized our view on emerging market (EM) equities, which are most exposed to trade risks, but continue to prefer the more defensive and highly diversified US market.
In fixed income, government bond valuations seem stretched after yields have fallen close to historical lows. Yet EM hard currency bonds look attractive and should benefit from a dovish Fed.
The importance of diversification
The equity roller-coaster of the past 18 months serves as a reminder of how vital it is for investors to diversify their portfolios. This can be achieved by scale or by diversification through our hedging the cycle or multi-asset premia strategies.