The trends in place before summer have outlasted the season. Once again, we note a clear outperformance by the US equity markets and political issues still very prominent in the emerging world and Europe. However, the macroeconomic backdrop remains promising in the majority of the world’s regions, except for certain emerging countries, even though the trend is less pronounced than at the start of the year.
Italy will be under close surveillance this quarter in anticipation of proposals on its 2019 budget. A political cacophony between leaders Salvini and Di Maio on the one hand, and Tria and Conte on the other, major uncertainties on the budget, a downward revision of growth, and the eventual risk of new elections: even though the market seems to be factoring in a certain risk premium, we are staying clear of Italy.
On the protectionist front, Trump is still using an aggressive tone toward China. On 5 September the public consultation on the tariffs on $200bn in imported products wraps up, and there is little doubt remaining as to the result of that consultation. Since the Chinese will probably announce retaliatory measures, the situation is not expected to stabilise in the short term. There are also uncertainties about NAFTA, with heated discussions between the US and Canada; there are tensions between Washington and Brussels too, despite overtures that left room for a positive outcome a few short weeks ago.
Neither is there any clarity about Brexit, as the time left to reach an agreement dwindles by the day. However, Michel Barnier made some reassuring statements, such as that he was ready to propose an agreement with a degree of collaboration that no third country had known. Yet the two camps' positions still seem very divided on the most sensitive issues (Irish border, free movement of people, etc.), and Theresa May's position in her own party is still just as uncomfortable.
The emerging markets will be in the news too with an ever-worsening situation in Argentina and Turkey. While in Argentina's case the situation is expected to stabilise thanks to the IMF, the story in Turkey will depend in large part on the will of its institutions. With runaway inflation and a currency in free-fall, a very strong reaction from the central bank is required, which means that Erdogan must finally accept a little more monetary orthodoxy.
In this highly uncertain environment, we are now maintaining very moderate convictions: equity exposure at close to benchmark, low duration exposure to “core” yields, and very specific emerging-market bets. On the other hand, we are maintaining our positive view on breakeven inflation, which has not reacted to the higher inflation outlook since the start of the year.
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