Global CIO view: Time to talk risks
As almost every month this year, new risk events affected financial markets in August. Though we retain our pro-growth positioning, we are mindful of the risks ahead, says Nannette Hechler-Fayd'Herbe, Head of Investment Strategy & Research.
The month of August saw Turkey and Argentina come under severe pressure as their governments failed to tackle serious fiscal imbalances. Combined with continued rhetoric over trade, this added to challenges for emerging market (EM) assets. On the positive side, progress in trade talks between Mexico and the USA, and strong US growth data were among the factors that drove US equities to new record highs.
Investing under political uncertainty
Undoubtedly politics has played an important role in driving financial markets this year and is likely to remain a key topic given events like the Italian budget debate and the US mid-term elections coming up in the months ahead. Investors should position accordingly in light of this political uncertainty.
Reiterate pro-growth investment strategy
As the growth backdrop remains favorable, we retain a positive stance on equities and commodities, reflecting that conviction with only small overweight positions in portfolios given the latent risks. In further acknowledgment of these risks, we now have a defensive tilt in our sector preferences, expressed through a preference for the healthcare sector. In fixed income, we now prefer a neutral duration in US and UK government bonds given higher yields. While we remain positive on the undervalued GBP against the USD, we are neutral on EUR/USD over 3–6 months in light of two-way political risks ahead.
EM consumption offers long-term opportunities
Despite the short-term headwinds, we remain optimistic on EM, as the vast majority of EM do not share the vulnerabilities of countries like Turkey. In fact, most EM offer very solid fundamentals. Our optimism also reinforces our long-term Supertrend "Angry societies – Multipolar world," which among other things seeks to tap opportunities related to strong EM consumption.