Summary
Goldilocks firmly in place
- Markets
continue to price in a Goldilocks environment with equities making further
gains
- Environment underpinned by more
stable, but generally moderate growth, contained inflation and dovish central
banks.
But this remains a ‘fragile’ Goldilocks: two plausible scenarios could cause
disruption
- Global
economic slowdown, which would hurt equities, but support government bonds
- Overheating
US economy, forcing the Federal Reserve to resume tightening and likely causing
both bonds and equities to suffer
Asset markets currently reflect Goldilocks, but not
its fragile nature
- Equities rallied again in April and are
now up by roughly 15% so far this year
- 10-year
US Treasury bond yield is close to 20bp lower
The US economy is still a bright spot
Despite growth stabilising in major
economies, markets are now more comfortable with the notion that more stable US
growth is ‘safer’ than the tentative European or Chinese stabilisation
Asset allocation
Neutral developed equities and government bonds, but
tactically short both
- Central
banks are supporting markets, but this year’s rally calls for caution in the
face of prevailing risks
- We are tactically short DM equities and
‘core’ EMU bonds
Still favour being long carry
- The
dovish tilt of the Fed and other major central banks continues to suppress
market volatility, lower real yields and fuel investors’ search for yield
- We are currently long emerging market
hard currency debt, which enjoys a high carry
and is protected against EM currency weakness
Exploiting asymmetries and building robust
portfolios
- Given
the uncertain macroeconomic backdrop, we favour building robust portfolios via
diversification trades at this point in the cycle
- We hold
several positions/RV trades with interesting asymmetries such as long 5-year US
Treasury vs. German bonds and long the French CAC vs. the German DAX
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