Taking a Breather Due to Lower Potential Growth
►The comeback for holders of risky assets was interrupted this week as growth concerns took over the agenda
►US assets managed to eke out gains with REITS especially having a good week
►EM and International equities had down weeks both in local currency as well as in USD terms
►On a YTD basis US Small Cap and REITS are in the lead – up 11.8%
►Commodity indices had a poor week as energy prices suffered large losses this past week
►In the context of balanced 60/40 strategies US strategies out-performed strategies more globally focused
►Aggressive, domestically focused multi-asset class strategies under-performed less risky options
►Within equities, Growth has slightly under-performed Value in 2019 but over the last year Growth remains solidly ahead
►Thus far in 2019 more aggressive multi-asset strategies have outperformed
Currencies:
►The USD had a strong week, up over 1%, despite ongoing budget discussions in Washington and a pause by the Fed in raising rates
►For 2019 we still expect the USD to depreciate slightly
►A depreciating USD will boost international asset returns – we expect this effect to persist in 2019
►A big question mark for this coming week is what happens to Brexit (yet again) – sterling is being massively tossed around depending on political prospects
►The Yen is now in an Up Trend phase as investors remain risk averse and the Yen is usually considered the “safe” trade
►RResource-oriented currencies experienced losses last week relative to the USD as oil and gas prices trended down
►In general, FX volatility has increased substantially in the last couple of months
Commodities:
►Commodity indices continue in a Down Trend even as oil markets have found some stability
►Oil and gas were down big last week due to warmer weather in the US and oversupply conditions
►Soybean prices should be firming up as a trade deal with China gets some traction
►Gold and Silver while slightly down last week are becoming a hedge for nervous equity investors
►However, we still view US Treasuries as the best hedging option for equity risk
This Coming Week:
►While risky assets have recovered we still think that risk is being shunned at the moment
►While not comfortable, US investors should allocate more money to non-US stocks due to their lower valuations and a depreciating USD
►The strong USD will not persist much stronger as the FED appears close to the end in terms of interest rate hikes
►The Value/Growth discussion is being overshadowed by sector rotation but on a risk-adjusted basis we believe that higher allocations to Value are warranted
►We are also watching out for any jump in inflationary expectations (which have been trending down)
►Tariffs are inflationary and will be reflected in higher consumer prices eventually
►Our biggest concerns revolve around a slowing global economy – The IMF recently lowered 2019 growth numbers to 3.5%
►We still see a risk on/off market this year making it difficult for short-term investors – probably best to extend horizons
►In general, investors seem very pessimistic making contrarian plays interesting from a tactical perspective
Earnings season in the US is in full swing
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ic J. Weigel
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