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The global macro picture

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Understanding how the global macro picture might unfold this year, and on into 2020, plays a key role in how active managers seek out opportunities for their portfolios. If, as suggested, market neutral strategies (and other low directional beta strategies) are preferred by investors, where might these strategies find an edge? 

Dr Anoosh Lachin, Portfolio Manager, Aspect Capital, runs a systematic macro strategy. Speaking on the How to invest globally, now panel, moderated by Professor Mary Pieterse-Bloem, Global Head Fixed Income, ABN AMRO, Lachlin shared what seemed to be a prevailing view at the forum; namely that central banks had and would continue to interfere in the markets to avoid economic collapse, and had stripped away a lot of volatility. But he said 2018 presented some good opportunities. 

“We are still big buyers of the US dollar. We like it on many different levels. It’s not just a carry trade. Bar political instability, the USD looks good on every measure,” said Lachin. 

The audience was asked: When do you think the US economy will hit its next recession? The overwhelming majority, 68.8 per cent, said they felt this could happen in 2020. 

Forward guidance has changed this year, with the US Federal Reserve indicating there would be no further rate hikes in 2019. Some feel the impetus to the US economy following the decision to cut corporate tax rates is now diminishing, and with trade agreement negotiations with China still ongoing, there is some concern that the  US economy will start to slow following a slowdown in Q4 last year to 2.2 per cent. 

“I’m not sure we need to be worried about a US recession,” commented Gerlof de Vrij, Managing Partner, Capstone Investment Advisors. “Most of the hiccups last year were technical and sentiment-driven. Flatness of the US yield curve is not a predictor of a recession but the tightening process is mature and will proportionately drag up bond yields. I think at this stage there’s little sign of anything imminent happening.” 

‘Japanification’ of Europe…? 

Thijs Knaap is Senior Strategist, APG, one of the world’s largest pension administration organisations with over 4 million pension fund members. When the panel discussion turned to Europe, there was an agreement that whilst the marketplace had been waiting for European reflation, it just hasn’t happened. 

Knaap commented that in his view, Europe is beginning to look a lot like Japan: low GDP growth, low population growth, low interest rates and low inflation growth, not to mention debt levels building up that show no sign of being resolved.

“I’m not sure there’s a clear catalyst for a crisis in the next 12 months,” remarked Knaap. “We need inflation but it’s hard to see where it will come from, right now.” 

The ECB has signalled that the first rate hike won’t happen until 2020 at the earliest and has cut its GDP growth forecast for 2019 to 1.1 per cent from 1.7 per cent previously estimated. It said that these monetary policy decisions were taken to ensure that inflation remains on a sustained path towards levels that are below, but close to, 2 per cent over the medium term. 

“I don’t think Europe’s economy will become Japan-like but it might take on some of its characteristics,” said de Vrij. 

The US/China Trade War 

China, and the wider Asia Pacific region, featured in several panel discussions at AIF 2019. 

China’s economy has its own dynamics and doesn’t follow western business cycles. The Shanghai Shenzhen CSI 300 Index is already up 32 per cent YTD, compared to 13.9 per cent for the S&P 500. 

The MSCI has announced that the MSCI Emerging Market index’s weighting to Chinese A-shares will rise from 0.7 per cent to 3.3 per cent this year, which will give investors greater opportunity to invest in China’s growth story. 

The audience was asked: Are you happy that China A shares are included in the MSCI equity index? Two thirds (64 per cent) of the audience voted Yes to this. 

Against this China sentiment, it was interesting to hear the thoughts of economists, who led an entertaining discussion that asked, “Are trade wars spiralling into a currency war?” 

For the US and China, the battleground is substantially uneven in the sense that China basically controls all of the possibilities to manipulate its currency, whereas the US has limited measures to do likewise. 

As FXCM has written, last July the People’s Bank of China set the reference rate for the Chinese renminbi to 6.7671 RMB against the US dollar. It led to an instant 0.9 per cent devaluation. 
“If there were a currency war, it would

be an uneven one,” said Lukas Daalder, Chief Investment Strategist at BlackRock (Amsterdam). Europe and the US have little scope to control their currencies because there is hardly any room left to cut interest rates. Daalder believes this will be more of a trade war than an FX war. 

Claire Dissaux, Head of Global Economics and Strategy, Millennium Global said initially President Trump’s strategy was to have trade wars with everyone: Japan, Korea, the EU, China. This evidently was not going to work. By selecting a country (China) that you import more goods from than they do from you, “then you’ve got more goods on which to impose tariffs”, said Dissaux. 

Seventy per cent of the audience cited the US, when asked which country posed the biggest threat to a currency war. In addition, 49 per cent said the US dollar would emerge as the strongest currency. 

There was a mixed reaction when asked if this trade/FX was was negatively impacting them as an asset manager. One third of the audience said Yes, while 44 per cent said No. 

On the FX side, the RMB has been stable and if anything is overvalued. The government does not want the RMB to depreciate too quickly because it would lead to capital outflows in the economy. As such, the RMB has one of the lowest implied volatilities among the major currencies traded globally, and it is one of the best outperforming currencies. 

There are signs that the US and China trade talks are progressing, in which case the panel highlighted the risk that President Trump could select Europe as the next candidate for introducing trade tariffs. 

Europe is effectively a proxy China play in that a large part of its economic performance relies on exporting to China. If China’s economy remains strong, it would offset some of the effects of US export tariffs, were this to happen. But as the panel concluded, longer term, Europe will continue to be an underperformer – either in a good world where there is a US/China trade deal or in a bad world where there is no deal. 

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