Investment Policy September 2018

Transcription

1 Investment Policy September 2018

2 Our market view in a nutshell September 2018 Divergence in economic performance, monetary policies and earnings growth have translated into a very uneven financial market performance this year between the US and the rest of the world. Moreover, the apparent resolution of the Fed to continue along its monetary policy normalization path is causing some stress in the system, manifesting itself in those areas that tend to be more affected, like emerging markets In our opinion, the sharp corrections in the Argentinean Peso and the Turkish Lira are not necessarily a harbinger of an emerging markets crisis, but just the result of these countries being singularly badly prepared to cope with a higher dollar and increasing interest rates. However, contagion cannot be ruled out if a market herd mentality prevails over discerning by fundamentals The probability of recession in developed economies looks low by a number of leading indicators like corporate spreads, consumer and business confidence, and financial market conditions. However, there is an increasing risk that the Fed could make a policy mistake as there is ample uncertainty about inflation and the neutral interest rate Amongst the risks, a slowdown in the Chinese economy remains our largest source of concern, as a hard landing could prove devastating for the global economy and financial markets. The likelihood of such scenario materializing is increasing as a result of the twin risks posed by the prospects of a Trade War and potential contagion from EM 2

3 MWM Investment Policy Asset Class View Rationale US Treasuries + Treasuries offer protection from a slowdown in growth although this less likely with the fiscal stimulus in the US whilst TIPS offer protection against rising inflation as a consequence of reflationary policies US Credit + Corporate debt and High Yield currently offer the best combination of risk and return. We prefer medium maturities as the yield curve has flattened considerably and there is little term premium to compensate for taking interest rate risk Fixed Income European Sovereign High quality debt in Euros presents a very unattractive combination of risk and return as current yields offer very little cushion to weather potential interest rates increases European Credit + In European credit we only see value in subordinated debt, asset-backed securities and short-duration high yield Emerging Markets We avoid Emerging Markets until there is more clarity on the new US administration trade policy, and the effects of a stronger dollar and higher financing costs for Emerging Markets are calibrated by the market US Equity valuations in the US remain very high, mostly supported by low long-term interest rates, but also due to a reacceleration in profit growth consequence of the tax reform and the deregulation agenda. We retain an exposure to the US market via quality growth companies Equities Europe Japan + + From a relative valuation perspective, we like European stocks as they trade at lower multiples, and we expect profits to pick up as economic activity accelerates Japanese stocks are the cheapest in developed markets, but have suffered recently due to sluggish growth, and concerns about global trade Emerging Markets Sectors & Themes + + Emerging markets have corrected sharply since the beginning of the year affected by a strong dollar and trade concerns. We deem the correction suffered has been excessive, and continue favoring India and Frontier Markets within EM Amongst others, we favor Biotechnology and listed Real Estate Alternative Investments Multi-Strategy Hedge Funds Commodities Private Equity + = = Multi-manager/ multi-strategy hedge funds that offer daily liquidity offer a much needed source of diversification Our diversified commodities and gold allocations, further help us to increase diversification and to protect the portfolios against a scenario of rising inflation Investing in late-stage private equity provides access to the asset class with liquidity provision up to a certain degree + Overweight Underweight = Neutral 3

4 Economic divergence continues JPMorgan Global Manufacturing PMI ISM Manufacturing PMI The divergence in economic growth between the US and the rest of the world keeps on widening, as US growth continues surprising on the upside, whilst Europe, Japan and emerging markets have slowed down Leading indicators, like the PMI, keep on pointing in this direction Source: Bloomberg 4

5 And unprecedented monetary divergence 100% 80% 60% 40% 20% 0% May-18 Jun-18 Jul-18 Aug-18 Prob. 2%-2.25% September FOMC Prob. 2.25%-2.5% December FOMC Prob. 2.5%-2.75% March FOMC Unprecedented monetary policy diverge worsens, with the Fed progressing in its normalization path, whilst Europe, Japan, and (again) China, continuing with an ultra-accommodative monetary policy Looking at market implied probabilities, the Fed is expected to tighten 2-3 times by March 2019 Source: Bloomberg 5

6 Deflation risk is over, but will inflation pick up? % % % 2.00% guiding policy by the stars in practice has been quite challenging of late because our best assessments of the location of the stars have been changing significantly J. Powell, Chair of the Federal Reserve 1.50% 1.00% 0.50% % NFIB Small Business Job Openings Hard to Fill (lhs) US CPI Urban Consumers Less Food & Energy (rhs) Inflation has normalized particularly in the US and deflation is no longer a threat, which provides support for the Fed, and other central banks, normalizing interest rates However, there are few signs pointing to an acceleration of inflation, despite the US economy running at close to its full potential. This increases the risk of making a policy mistake by tightening too aggressively Source: Bloomberg 6

7 Market verdict is still unclear 3.5% 1.0% 3.0% 0.9% 0.8% 2.5% 0.7% 2.0% 0.6% 1.5% 0.5% 1.0% % 10Yr - 2Yr Investment Grade YTM (lhs) IG Spread Compression vs. UST (rhs) The flattening of the yield curve in the US can be interpreted as if the market were signaling an increased probability of recession, or as a reflection of very low neutral interest rates as a result of structural changes in the economy driven by globalization, technology and demographics Corporate spreads a rather pointing to the second factor, but in any case the Fed needs necessarily to incorporate this clue into their decision making Source: Bloomberg 7

8 Emerging Markets under stress 40% % % % 400 0% % % % MSCI EM Index (lhs) MSCI Emerging Markets Currency Index (lhs) J.P. Morgan EMBI Global Spread (rhs) Rising interest rates, slowing global growth and a stronger dollar are impacting emerging markets currencies, bonds and equities alike Countries like Turkey or Argentina that in a weaker position (current account deficits, dollar financing, poor governance, etc.) are suffering the most. However, it is too early to speak about a generalized emerging markets crisis Source: Bloomberg 8

9 Trade war rhetoric discounted by markets 30% % 80 20% 60 15% 40 10% 20 5% Sep 17 Oct 17 Nov 17 Dec 17 Jan 18 Feb 18 Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18 0 VIX Index (lhs) "Trade War" searches in Google (rhs) Trade war rhetoric has been to a large extent discounted by markets, as it is becoming increasingly clear that it will be a long-lasting dispute that will not have an immediate resolution However, the twin risks of Trade War and EM contagion make us to be even more observant on China, as a repeat of the concerns about a hard landing of the Chinese economy would be heavily felt in financial markets Source: Bloomberg and Google Trends 9

10 Economic war to be uncertain and long-lasting 70,000 60,000 50,000 40,000 30,000 20,000 10, Germany Japan US China Beyond the short-term motivations to achieve better terms of trade with those trading partners with whom the US has a trading deficit, lies a concern of the country loosing its hegemonic role Although it is very likely that the Chinese economy will overtake that of the US within the next decades, maintaining the US technological advantage is a strategic imperative for the US administration Source: Bloomberg 10

11 USD fundamentals will prevail over Twitter % 2.0% % % 1.10 the dollar is getting too strong a strong dollar puts us at a disadvantage 1.4% 1.05 our companies can t compete now because our currency is too strong 1.2% 1.00 Jan 17 Mar 17 May 17 Jul 17 Sep 17 Nov 17 Jan 18 Mar 18 May 18 Jul 18 Sep % EUR/USD (lhs) Spread 10Yr Swap USD vs. EUR (rhs) Trump s tweets can do little to weaken the dollar if fundamentals are heavily underpinning the currency Interest rate differentials and growth differentials are massively in favor of the dollar, whilst inflation is relatively similar and the PPP level is not that far form the current cross Source: Bloomberg 11

12 Model portfolio evolution ishares $ Treasury Bond 3-7yr UCITS ETF ishares $ TIPS ishartes Ultrashort Bond UCITS ETF ishares USD Short Duration Corporate Bond Muzinich Short-Duration High Yield M&G Global Floating Rate High Yield Fund Franklin Floating Rate II Oddo Compass Euro Credit Short Duration USDh Neuberger Berman Corporate Hybrid GAM Star Credit Opportunities Ellipsis European Convertible Fund Schroder ISF - Global Convertible Bond Wellington Global Quality Growth Portfolio Bonus Certificate SMI Bonus Certificate SX5E BNP Paribas TIER US 4% Index Pictet Indian Equities Polar Capital Biotechnology Fund Henderson Global Property Equities T.Row Price Frontier Markets Equity Fund Polar Capital Funds Japan ishares Diversified Commodity Swap UCITS ishares Gold (CH) Amura Absolute Return Goldman Sachs Global Multi-Manager Alternatives Franklin K2 Alternative Strategies Fund Permal Alternative Income Strategies Partners Group Global Value* -15% -10% -5% 0% 5% 10% 15% Ytd Last Month Source: Bloomberg as of September 1, 2018 * Fund publishes monthly NAV with a 1 month of delay 12

13 Investment scenarios Scenario 1 Recession by political/policy accident Scenario 2 Goldilocks Scenario 3 New regime Drivers Global economic slowdown caused by political accidents or policy errors (Trade war with China, EU breakup, a too aggressive Fed, etc.) Deflationary scenario due to a combination of low growth and structural factors, although the rise of protectionism would be inflationary The Fed will have to reverse course, which would be complicated if inflation is rising The fiscal stimulus in the US provides a short-term impulse to the global economy, but not enough to attain a higher growth trajectory Inflation, particularly in the US will pick-up, but remains subdued globally due to structural factors (demographics, low aggregated demand, deleveraging) The Fed will continue its normalization path Growth concerns dissipate, with economic activity accelerating in US, Europe and Japan Inflation in the US increases, as a consequence of president Trump s fiscal stimulus, and pulls other developed economies off deflation The Fed will have to step up the pace of rate increases and/or reduce balance sheet Market impact Correction in credit due to a rise in defaults and a widening of corporate spreads Correction in equities due to lower projected earnings, though low rates will offer support Sovereign and IG credit to profit due to flight to quality and the continuation of an ultra-loose monetary policy globally USD neutral to weak as flight to quality is counterbalanced by low interest rates Commodities will fall Equities appreciate moderately, with Europe and Japan catching up with the US Credit spreads remain stable as the credit cycle is further elongated Sovereigns suffer as monetary policy is progressively normalized USD appreciate moderately due to higher interest rate differentials Commodity prices will rise in the shortterm, normalizing once the impulse vanishes Impact on equities will depend on how much real economic growth is sustained, and how accommodative the Fed remains Sovereign and IG bonds will face steep losses due to higher rates, particularly if long-term inflation expectations rise Corporate credit will correct moderately if inflation comes together with higher growth The USD will appreciate, particularly against those currencies facing deflation Commodities will gain from higher inflation Probability 40% (+5%) 30% (-5%) 30% Short-term catalyzers Fiscal stimulus in the US, improvement in macro-data globally, lower geopolitical tensions Other risks Trade wars, EM crisis, Spread of populist political parties, China slowdown, Terrorism 13

14 MWM Model Portfolio Balanced USD Asset Allocation Currency Allocation Multi-Strategy 10% PE Cash 2% Short-Term IG 10% Gold Diversified Frontier Japan Real Estate Biotechnology India 6% 35% Volatility 16% 1 2% 44% TIPS 5% Lev. Loans2 UST Growth 4% Convertible 6% Subordinated 8% HY Europe HY US HY Floating USD 100% Cash Fixed Income Equity Commodities Alternative Inv. USD 14

15 MWM Investment Profiles Conservative Balanced Growth 5% Cash 5% 2% 5% 1% Fixed Income 64% 62% 4 44% 22% 26% 24% 38% 52% Equities 2 35% 49% 2% 4% 6% Commodities 4% 6% 8% Alternative Investments 5% 8% 10% 1 15% 16% Strategic Asset Allocation 15

16 MWM Model Portfolio Asset Allocation evolution 60% 50% 40% 30% 20% 10% 0% Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Cash Fixed Income Equities Commodities Alternatives 16

17 MWM Model Portfolio VaR evolution 14% 7% 12% 6% 10% 5% 8% 4% 6% 4% 2% 2% 1% 0% % 1Y VaR 99% MWM Balanced (lhs) 1Y Std. Dev MWM Balanced (rhs) 1Y Std. Dev Benchmark (rhs) 17

18 MWM Model Portfolio Peer comparison 8% 6% 4% 2% 0% +0.11% -2% -4% -6% Dec 17 Jan 18 Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18 Sep 18 Janus Balanced Fund Invesco Balanced Risk Allocation Fund Investec Global Strategic Managed Fund Templeton Global Income Fund UBS Global Allocation PIMCO Global Multi-Asset Fund UBAM Multifunds Allocation 50 Julius Baer Strategy Balanced BlackRock Global Allocation Fund Nordea Stable Return Fund Schroder Global Multi-Asset Flexible BNY Mellon Global Real Return Fund JPMorgan Global Balanced Fund Carmignac Patrimoine MWM Balanced USD Total Return (Ytd 1 ): 7 th out of 15 Standard Deviation (1 year 1 ): 1 st out of 15 Downside Risk (1 year 1 ): 1 st out of 15 Sharp Ratio (1 year 1 ): 8 th out of 15 1 As of September 4, 2018 Source: Bloomberg 18

19 MWM Model Portfolio Ytd performance 4% 2% 1% 0% -1% -2% Dec 17 Jan 18 Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18 Sep 18 MWM Balanced USD Benchmark Total Return (Ytd 1 ): 0.11% vs. 1.84% Benchmark 2 Standard Deviation (Ytd 1 ): 2.81% vs. 4.84% Benchmark 2 Downside Risk (Ytd 1 ): 2.2 vs. 3.76% Benchmark 2 Sharpe Ratio (Ytd 1 ): vs Benchmark 2 1 As of September 4, Benchmark = 5% Fed Funds + 4 JPM Global Aggregate Bond Index + 38% MSCI World + 4% S&P GSCI + 10% HFRI FoHF 19

20 MWM Model Portfolio Historical performance (1) 50% 40% 30% 20% 10% 0% -10% -20% Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 Dec 17 Mar 18 Jun 18 MWM Balanced USD Benchmark Difference Total Return (1 year 1 ): 2.02% vs. 5.61% Benchmark 2 Total Return (3 year 1 ): 7.36% vs % Benchmark 2 Total Return (Since Jan 12 1 ): 27.38% vs % Benchmark 2 1 As of September 4, Benchmark = 5% Fed Funds + 4 JPM Global Aggregate Bond Index + 38% MSCI World + 4% S&P GSCI + 10% HFRI FoHF 20

21 MWM Model Portfolio Historical performance (2) 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Apr 18 Jul 18 MWM Balanced USD Benchmark Standard Deviation (1 year 1 ): 2.48% vs. 4.19% Benchmark 2 Downside Risk (1 year 1 ): 1.95% vs. 3.27% Benchmark 2 Sharpe Ratio (1 year 1 ): 0.18 vs Benchmark 2 Var 95% - 1day (1 year 1 ): -0.24% vs % Benchmark 2 1 As of September 4, Benchmark = 5% Fed Funds + 4 JPM Global Aggregate Bond Index + 38% MSCI World + 4% S&P GSCI + 10% HFRI FoHF 21

22 This document is for information purposes only and does not constitute, and may not be construed as, a recommendation, offer or solicitation to buy or sell any securities and/or assets mentioned herein. Nor may the information contained herein be considered as definitive, because it is subject to unforeseeable changes and amendments. Past performance does not guarantee future performance, and none of the information is intended to suggest that any of the returns set forth herein will be obtained in the future. The fact that MWM can provide information regarding the status, development, evaluation, etc. in relation to markets or specific assets cannot be construed as a commitment or guarantee of performance; and MWM does not assume any liability for the performance of these assets or markets. Data on investment stocks, their yields and other characteristics are based on or derived from information from reliable sources, which are generally available to the general public, and do not represent a commitment, warranty or liability of MWM. c/ de l Aigüeta, 3 AD500 Andorra la Vella Principat d Andorra