Bittersweet end to 2018
Due to a plethora of economic and political uncertainties our strategy in Q4 2018 proved to be diligent and our focus in Q1 2019 will continue to be on a more defensive positioning. December was particularly volatile given the market’s reaction to the US Federal Reserve’s fourth interest rate hike of the year and there seems to be no end to spread oscillations (and further widenings) across all sectors given Brexit, ongoing trade tensions between the US and China and slower global growth.
Although we managed to avoid problematic names such as General Electric (which we sold a year ago) and Pacific Gas & Electric (PG&E), attractive paybacks in corporate bonds were hard to come by in Q4’s increasingly volatile environment. For 2018 as a whole, we fared better in our Japanese Government Bond (JGB), US treasury and UK gilt holdings. Considering the rising macroeconomic and geopolitical risks, we now are reallocating and intend to lower our weightings in corporate credit.
Radar for Q1 2019
We remain more cautious on credit and rates not least considering the economic frictions between major powers and how such geo-political risks impact the markets. Even though we expect the Fed to make fewer interest rate rises than were previously forecasted, rising debt whether it is corporate or sovereign is also a concern and our main focus will be on avoiding potential pitfalls in this risky climate.
Despite the slower pace of growth in the US and Europe, many economic indicators are still solid and point towards a healthy growth rate this year. We predict GDP growth in developed economies to be supported by private consumption, wage rises and prospects for further relaxation in fiscal policies. This should put upward pressure on bond yields, especially at a time when central banks have committed themselves to normalising monetary policies by ending asset purchases and raising rates. We therefore renew our short duration positioning and focus more on higher quality names.
The value of investments may fall as well as rise and investors may not get back the amount invested.
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CLI01348 Expiry 30 April 2019