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Multi-asset focus: Limited potential for capital gains in 2019

Publication Date: 12 Dec 2018 - By ReachX Team By ReachX Team
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FX & Rates Macro Investment Strategies Multi Asset Global

There would be "limited potential" for capital gains again in 2019 due to a combination of headwinds, according to a group of analysts from a leading French investment bank. 

In a note to clients, Société Générale’s Alain Bokobza, Gaelle Blanchard and Sophie Huynh, said most financial assets remain "rather expensive", with the exception of the US Treasury and inflation markets, and some Emerging Market assets, especially China. 

"The US Federal Reserve will continue to up the price of money and draw liquidity off the global economy while debt has never been higher; and this time, with President Donald Trump having lost his majority in the House of Representatives, the probability of another fiscal boost is extremely low,” they wrote.

The SocGen analysts say cyclical re-convergence, and a new asymmetry for the Federal Reserve Market conditions should, nevertheless, differ somewhat to those of 2018 in several aspects 2019 is set to be a year of economic re-convergence. 

"The asymmetry of the Fed's profile should lead market anticipations to swing from fear of more tightening and flattening to fear of less tightening and bull steepening. Meanwhile, the expensive US dollar (-3 points to 29%) should return to its structural downward trajectory initiated in early 2017 and Growth stocks should continue to de-rate. We continue to recommend heavy exposure to US 10-year Treasuries (13%).”

The trio also said the market is getting "somewhat" used to new forms of populism. "Since the Brexit referendum in June 2016, the markets have been grappling with the rise of ‘populist' parties. As an economic force, ‘populism' has altered the balance, with more fiscal spending putting pressure on central banks to act decisively and tighten."

Hence, SocGen analysts believe it will be necessary to adapt portfolios in 2019 and prepare for central banks in Europe, and later Japan starting to unwind quantitative easing, while both economies recover. 

"We reweight the euro (+7.5 points to 38.5%) and the yen (+5 points to 15.5%), mainly through equities. Exposure to the Value style is a good way to benefit from the central banks' exit in both regions."

SocGen substantially reduced risk twice last year, in September (MAP 4Q17) and December 2017 (MAP 1Q18) as, after several years of exceptional liquidity injections, it’s analysts saw the Fed’s monetary policy normalisation/tightening as detrimental to both bonds and equities. 

“We see no reason to upgrade global risk now, and believe the best time to position for the next US recession should become more apparent in the latter part of 2019,” the concluded.

 

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