Financial Markets
The choppy bottoming process in the Chinese economy will likely continue in the coming quarters. Second quarter GDP numbers to be released later this week will likely indicate that the economic downtrend has halted. Our model is currently predicting a pickup in Chinese growth for the first time since 2013.
The breakout in the S&P 500 could boost flows to EM, and momentum could overwhelm fundamentals for several weeks. Nevertheless, U.S. interest rate expectations will rise and it, along with weak EM profits, will cap upside in EM risk assets. Take profits on our short EM stocks/long 30-year U.S. Treasurys position. Reduce short exposure to EM currencies by closing the currency trades where the long side is partially against the yen.
Long-time subscriber Mr. X recently visited our office to discuss three issues: Brexit, the outlook for China and the seeming contraction between the performance of equity and bond markets. This <i>Special Report</i> is a transcript of our conversation and, not surprisingly, the broad conclusions supported a cautious investment strategy.
A spike in economic uncertainty explains the recent move lower in Treasury yields. Given the resilience of global growth, we expect yields to rise as uncertainty ebbs in the coming months.
Today, on a tactical basis, we are moving our allocation on EM hard currency bonds to neutral from underweight. In this <i>Special Report</i>, we elaborate on the reasons leading to this decision.
Our <i>Cyclical Indicator Update</i> reveals that a defensive portfolio strategy remains the best bet to navigate the crosscurrents of stagnant profit/economic growth yet abundant global liquidity.
Please see attached our <i>Third Quarter Strategy Outlook<i/> which discusses the major investment themes and views we see playing out for the rest of the year.
Smart beta strategies can be useful in both strategic and tactical asset allocation. Combining different smart beta strategies can smooth out the cyclicality of individual strategy and provide a better return/risk profile.
Brexit is putting our bearish short-term dollar view in question as global policy uncertainty has surged. Yet, investors are displaying elevated signs of risk aversion but the global economy still looks fine. This dissonance is likely to end with investors increasing risk taking, a bearish development for the counter-cyclical dollar. Favor commodity currencies over European ones.
We test three channels of contagion from the Brexit shock: political, banking system, and economic.