- The UK’s equities and currency are discounting rising risks of both
a ‘no deal’ Brexit and a snap general election. If concerns get
overdone, late summer could provide good long-term buying opportunities. The market
is reasonably valued with good dividend yield support. Sterling is well supported
in real-exchange rate terms.
- European economic growth is weakening. The European Central Bank
is more dovish and will announce further stimulus measures in September.
- Worsening trade outlook. The US-China trade war re-escalation
has negative implications for Europe. Furthermore EU-US trade tensions are likely
to intensify in the second half of 2019.
- Portfolio construction should reflect the late-cycle conditions.
Stay invested but diversified. Be very selective in fixed income corporate bonds;
favor defensive equities over cyclicals, and value over growth.
- Small underweight Europe ex-UK equities. Need for selectivity
by country (prefer Switzerland), by sector (prefer technology and healthcare), and
by theme (prefer high dividend yielders).
- Underweight European sovereign bonds. Ten-year German Bund yield
of -0.49% is poor value regardless of potential renewed ECB buying support.
- Underweight Europe and UK investment grade corporate bonds. Renewed
central bank buying will drive yields to even more expensive levels. Yields can be
enhanced through hedging back into USD.
- Neutral high yield corporate bonds. The average yield of 3.5%
is historically low, yet likely to go lower as investors reach for yield. There is
decent coupon support, a low level of defaults, and only modest leverage.
- EUR/USD is likely to keep drifting lower. This is due to a combination
of further ECB easing, rising trade tensions, ‘no deal’ Brexit risk, and
the unresolved Italian debt and bank sector challenges.
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