Union Investment confirms neutral risk positioning
UIC positions itself a little more cautiously
Neutral risk strategy, RoRo meter still set at 3
At its regular meeting in August, the Union Investment Committee (UIC) adopted a slightly more defensive position. Although it maintained the RoRo meter at level 3, there were adjustments at the level of individual asset classes and sub-asset classes, which resulted in a more cautious positioning of the model portfolio. The background to this policy shift is an expected change in the factors driving the capital markets. In recent months, the actions of the central banks have often had the greatest impact, but the UIC believes that the state of the economy will be a more important factor going forward. The anticipation of expansionary monetary policy in both the US and the eurozone has meant that the weak macro data in the stock markets has so far been reflected in prices only to a limited extent. This situation is likely to gradually change, as leading indicators suggest growth will continue to weaken worldwide, especially in those countries that are particularly dependent on foreign trade. For the capital markets, this points to a rocky road ahead, where negative influences outweigh the positives.
Further weakening of global growth
The latest escalation in the trade dispute between the US and China has ratcheted up the level of uncertainty once again, not only in the capital markets but also – and above all – in the real economy. Important business decisions, such as capital investment, are being delayed for as long as possible in the hope that an agreement will be reached. However, the dispute is about more than just trade policy. Ultimately, it is a battle for hegemony between the two superpowers, which means that a continuation of the dispute is highly probable.
The economic headwinds – particularly for economies that trade heavily with the rest of the world – are therefore likely to persist. China and Germany are prime examples of such economies. If the situation there deteriorates any further, governments are quite likely to intervene with fiscal policy measures. Overall, the UIC thus assumes a further slowdown in global economic growth. This also applies to the big national economies, albeit to differing degrees, but a global recession is not expected. In the US, the indications are that growth will slow, but the economy will not contract.
Monetary policy losing traction
The UIC is sticking to its assessment of an imminent easing of monetary policy in both the US and the eurozone. Based on this assumption, both the European Central Bank (ECB) and the Federal Reserve (Fed) are likely to cut their base rates in September. The ECB is also expected to introduce tiered interest rates for its deposit facility and to announce a resumption of its asset purchase programme.
The central banks will thus act decisively. However, it will be difficult to exceed the already high market expectations, particularly in the case of the ECB, and monetary policy measures are beginning to lose traction in the real economy. This is partly due to high levels of uncertainty. It is also due to the effects of the law of diminishing returns when it comes to monetary policy stimuli. In an environment of low or even negative interest rates (as is the case in the eurozone), the marginal effect of further rate cuts is comparatively low. In the US, which firstly has more room for manoeuvre and, secondly, has not been so hard hit by the trade dispute, the impact of monetary policy measures is likely to be greater.
Charts of the month: US economy still proving relatively robust
Asset classes: industrialised countries’ equities reduced, stronger focus on spread products in the fixed-income asset class
Carry still in Focus
In contrast with the other asset classes, monetary policy will remain an important factor for the bond markets in the eurozone. The interest-rate cut expected in September and the launch of a new purchase programme should, like the ongoing hunt for returns, continue to provide support for the spread asset classes going forward. That is why investment-grade corporate bonds are still favoured among eurozone bonds. Low real rates of return and stable oil prices are bolstering government bonds from emerging markets. The UIC is therefore not making any changes to its fixed-income positioning.
Neutral position in equities from developed markets; Shares from emerging markets underweighted
.The UIC is retaining its underweight position in equities, but has carried out a reallocation within the asset class. The committee has upgraded equities from industrialised countries, which were previously underweighted, to a neutral weighting. This is mainly due to the high weighting of US shares within the block of equities from industrialised countries. Although the macroeconomic picture in the US is gradually deteriorating too, it is still much brighter than that of the eurozone, for example. Conversely, the UIC has given equities from emerging markets an underweight position. Because of the part that they play in global trade, the emerging markets are suffering as a result of the trade dispute and the economic slowdown.
Underweighting of industrial metals and energy commodities
The gloomier economic conditions are having a negative impact on cyclical commodities. The decline in global trade is taking its toll on industrial metals. The bulk of demand comes from China, which is adversely affected by the economic slowdown and the trade dispute. As there are still no signs of a Chinese stimulus programme at present, the UIC has opted for a short position in industrial metals. Energy commodities are also heavily dependent on the performance of the global economy. The economic downturn is likely to lead to a softening of demand in the months ahead, putting further pressure on prices. Energy commodities have been underweighted by the committee.
US dollar versus pound sterling
Political issues will probably remain a major factor in the currency markets, and this also applies to pound sterling. An early election appears to be on the cards in the United Kingdom. However, it seems that Prime Minister Boris Johnson is managing to delay the date of the election until after 31 October. Most recently, with Prime Minister Boris Johnson’s defeats in Parliament, a No-Deal Brexit has, at least in the short-term, become much less likely.
Monetary policy is also likely to have a diminishing impact on the US dollar going forward, even though the Fed has by far the most monetary policy levers at its disposal among the major central banks. Another factor in favour of the US dollar is that the US economy is still robust, particularly in comparison with regions that are more dependent on global trade, such as the eurozone and the emerging markets in Asia.
Convertible bonds no longer on an uptrend
The falling equity markets resulted in a downtrend for convertible bonds in August. Sensitivity to the equity markets reduced significantly to around 39 per cent, down from 46 per cent in July. Valuations declined slightly. Convertible bonds thus have a relatively low valuation and a high degree of convexity. There were a number of large new issues, particularly in the US, that were well received by the market.
Our portfolio holdings
Unless otherwise noted, all information and illustrations are as at 27 August 2019.