Macro Quarterly Bend, don’t break

While the second half of 2019 will be eventful, economic expansion will bend and not break. What opportunities can this create for investors? Evan Brown, head of Macro Asset Allocation Strategy explains.

04 Jun 2019

Geopolitical developments have always played a part in markets but their impact on economic fundamentals and investment outcomes is only growing. This reality demands an ability to be open-minded about political and economic possibilities that do not have an obvious historical analogue. It also demands a certain humility that we cannot predict the future, and the need to hedge our portfolios where possible against specific outcomes that lie outside of our base case.

We have therefore built our investment process around key themes, or hypotheses, that we monitor for confirmation. Themes serve as our 'North Stars'—core views that we build trades around to express them:

 

 

Themes

Themes

Related case study

Related case study

 

1.

Themes

Global growth to steady around trend

Related case study

Long EAFE vs US Equities

 

2.

Themes

China finding a cyclical bottom

Related case study

Long Asia hard currency debt

 

3.

Themes

Central banks to extend the cycle

Related case study

Long China Agg FX Hedged

 

4.

Themes

Geopolitics and protectionism

Related case study

Long Japanese yen vs. Korean won

 

5.

Themes

 A higher volatility regime

Related case study

Short Aussie dollar vs. US dollar

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Theme highlight – China finding a cyclical bottom

As the world's second largest economy and the integral anchor in the global supply chain, China's economic health is crucial not only to the overall dynamics of the global economy but to its relative balance with the United States.

An imbalanced global economy, driven primarily by the US, can create destabilizing forces via dollar strength which stress indebted emerging markets and create negative feedback loops. With the US fiscal stimulus fading over the rest of the year and into 2020, China's growth stabilization is critical to provide support and balance to the global economy.

We believe that China's easing of monetary, fiscal and regulatory policy is beginning to take hold, although again the results are consistent with stabilization as opposed to a sharp rebound. Credit growth has risen and infrastructure investment is showing signs of life.

Moreover, we do not doubt China's willingness and ability to provide additional stimulus should trade tensions or other headwinds create the need.

Case study: Long Asia hard currency debt
An environment with steadying, rather than accelerating or sharply deteriorating Chinese growth, is positive for carry.

As we look for higher-yielding assets across the globe, we find Asian hard currency debt quite attractive compared to the low yields on offer in developed markets.

Heavily weighted towards China's property sector, we believe that ongoing policy support for the labor market and household income is supportive of this view. 

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