INVESTMENT OUTLOOK JUNE 2018 MACRO-ECONOMICS. Developed and Emerging Markets

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1 INVESTMENT OUTLOOK JUNE 2018 MACRO-ECONOMICS Developed and Emerging Markets Trade tariffs and protectionist themes have dominated global markets throughout the year and risks have further heightened through May. As a result, economists have observed a synchronised weakening in important trade measures. The contraction was witnessed amongst advanced and emerging economies, reporting falls in export volumes. The outlier being the US, where recent fiscal intervention has allowed for a boost to growth statistics. This supports the US Federal Reserve in raising interest rates over the short-to-medium term. This could be slowed, however, should fundamental differences in US and Chinese trade talks become irreconcilable. Chinese exports have recently signalled failure to increase prices and orders declining. European inflation continues to stall and uncertainties surrounding a moderation across wider indicators, has led investors to believe stimulus bond purchases will be maintained and therefore not ending in September this year. Japan faces ongoing difficulties with growth contraction and remains distant from it s inflationary targets. Emerging markets have sufferd once again, in the wake of protectionism, higher rates and growing funding costs. Currencies The US Dollar has surged through May as investor attention has turned to the dislocation between interest rate differentials and currency market princing amongst its major traded peers. Emerging market currencies have come under intense selling pressure, reversing year-to-date gains. Notable under-performance coming from the Argentinian Peso and Turkish Lira, despite domestic intervention. Energy and other commodities OPEC and a group of non-opec countries have suggested discussing plans to remove the current limitations on Oil output as global inventories stand close to target, helping support Brent Crude at a three year high in recent weeks. The broad-commodity lanscape has performed well through most of the month, faltering in the final week, due again to trade concerns, a strong US Dollar and a sharp decline in Oil benchmarks. 1

2 MACRO-ECONOMICS AND CURRENCIES Illustration (Section Macro-Economics and Currencies ): Commodities vs. Equities, Government Bonds and US Dollar Source: Bloomberg Finance L.P. Graph: Quantum Global Investment Management (1-year rolling, daily, indexed) Indices: Commodities: RJ/CRB Commodity Index Total Return Price Index. The base currency is USD. Equities: MSCI All Country World Index includes both developed and emerging world markets. The base currency is USD. Govt. Bonds: The Bank of America Merrill Lynch Global Government Index tracks the performance of investment grade sovereign debt in local currency. The base currency is USD. USD: US Dollar Index indicates the general international value of the USD by averaging the exchange rates between the USD and major world currencies. 2

3 FIXED INCOME Global Bond Markets Sovereign yields trended higher on positive readings of economic data, with the US in particular focus. The US Federal Reserve continues to be at the forefront of major central banks implementing less accommodative monetary policy, as it's domestic economy indicates growth and expansion. Another Federal Funds Rate increase in June is anticipated by investors, although guidance delivered raised questions as to whether the US will experience further rate hikes, at a quicker pace. The 2-year US Treasury traded at the highest level in a decade, whilst 10-year Treasury yielded 3%. In Europe, the difficulties in Italy to build a government affected the performance of the governments bonds. Core European sovereign yields trended lower, whilst Europe periphery government bond yield moved upwards. Global credit spreads continued to move sideways across the Investment Grade and High Yield universes, after spreads tightened in the previous month on the back of a better outlook for global economic growth and reduced geopolitical tensions. Only lower rated European bonds bucked the trend, where credit risk widened as a consequence of the political turmoil in Italy. Government Bonds vs. Corporate Investment Grade and Corporate High Yield Source: Bloomberg Finance L.P. Graph: Quantum Global Investment Management (1-year rolling, daily, indexed) Indices: US Treasury: The US Treasury Bond Index includes fixed rate coupon US Treasuries with maturities greater than 12 months. The base currency is USD Eurozone Sovereign: The Eurozone Sovereign Bond Index includes fixed-rate local currency securities issued by Eurozone countries. The base currency is EUR Japan Sovereign: The Japan Sovereign Bond Index includes fixed-rate JPY securities issued by Japan. The base currency is JPY. IG Corp: The Global Investment Grade Corporate Bond Index includes investment grade, fixed rate securities issued in major domestic and Euro-bond markets. The base currency is USD HY Corp: The Global High Yield Corporate Bond Index includes non-investment grade, fixed-rate, taxable securities issued by global corporates. The base currency is USD. 3

4 EQUITIES Global Equity Markets Throughout the month, equity markets reversed the sell-off trend experienced in the previous months. US stocks performed positively in absolute terms, whilst European equity indices were unable to follow due to political instability in Italy. Going forward, volatility should continue, increasing the magnitude of possible corrections ahead of geopolitical risks or unexpected disappointment in fundamentals. Another breakout year for stocks is always dependent on a combination of significant upside surprise on earnings and a modest expansion of valuations. While earnings have revised up sharply since January 1st, valuation has fallen and now seems less likely to expand from 2017 levels given the increased uncertainty on the trade front. Rising U.S. protectionism is the clearest menace to the near-term global outlook, in our view. We see increasing U.S. actions against China and other countries sparking bouts of volatility but not derailing the benign economic and market backdrop. Yet any escalation into a trade war could deal knock-on blows to sentiment and change our view. A renewed surge in bond yields is another risk, but we believe equities can do well as long as yield rises are steady and driven by improving growth. MAJOR EQUITY INDICES & VOLATILITY Source: Bloomberg Finance L.P. Graph: Quantum Global Investment Management (1-year rolling, daily, indexed) Indices: S6P 500: The Standard & Poor s 500 Index includes 500 U.S stocks representing all major industries. The base currency is USD Stoxx Europe: The STOXX Europe 600 Index includes 600 stocks across 18 countries of the European region. The bas currency is EUR. Nikkei-225: The Nikkei-225 Index includes 225 top-rated Japanese companies. The base currency is JPY. MSCI EM: The MSCI Daily Total Return Net Emerging Market index captures the large and mid cap representation with 832 stocks across 23 Emerging Markets countries. The base currency is USD VIX Index: The Chicago Board Options Exchange Volatility Index reflects a market estimate of future volatility and includes an average of the implied volatilities for a wide range of option strikes. The base currency is USD. 4

5 OUTLOOK Market Implication We maintain our investment scenario for 2018 focused on a backdrop of synchronized global growth, rising inflation and interest rates, higher equity market volatility and more economic uncertainty. Asset Allocation In our multi-asset portfolios, we maintain our overweight to global stocks vs. bonds, but have scaled back modestly on its size. We continue to prefer an overweight in High Yield and Emerging Market debt within our Fixed Income allocation. The investment cycle is maturing and will prove more challenging heading forward. Aggregate monetary conditions remain accommodative, but will slowly become less supportive. Fixed Income: Sovereign bond yields should continue to rise in response to strong growth and higher inflation expectations. We maintain a bias to short-duration and a larger allocation to High Yield and Emerging Market debt. Such bond positioning should deliver positive returns in absolute and relative terms for the rest of the year. Equities: Equity markets will remain volatile as economic growth momentum moderates and the gradual build-up of inflationary pressures persists. For the time being, fundamentals favor value over growth stocks. Given the current positive earnings backdrop, we remain committed to a moderately pro-growth portfolio construction stance. Currencies: We see upside potential for the U.S. dollar, but gains are likely to be capped as non-u.s. central banks move toward normalizing policy. Commodities: Oil prices should be supported in the medium term by a set of factors such as the reduction in global oil inventories, political tensions in the Middle East and Iran sanctions. 5

6 DISCLAIMER Quantum Global Investment Management AG ( Quantum Global ) has taken every effort to ensure the accuracy of the information contained in this report. All information contained in this report is obtained from sources believed to be accurate and reliable. The estimates, strategies, and views expressed in the report are based upon past or current market conditions and/or data and information provided by third parties (which has not been independently verified) and is subject to change without notice. Quantum Global does not guarantee the appropriateness, accuracy, usefulness or any other matter whatsoever regarding this information. While all information presented is believed to be accurate and reliable, it is prepared without audit unless otherwise identified as audited financial information. Due to the possibility of human or mechanical error as well as other factors, this information is provided as is without warranty of any kind and Quantum Global makes no representation, express or implied, as to the accuracy, reliability, completeness, or timeliness of this information, and is not responsible for any loss or damages incurred by parties using this information. Forward Looking Statements The report may contain forward-looking statements. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words believe, anticipate, expect, estimate, intend, project, plan, will likely continue, will likely result, or words or phrases with similar meaning. Forward-looking statements involve risks and uncertainties, including, but not limited to, economic, competitive, governmental and technological factors outside of Quantum Global s control. Quantum Global does not intend, and undertakes no obligation, to update any forward looking statements. 6