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Weekly Market and Portfolio Update

Geraldine Sundstrom, portfolio manager, comments on what’s moving markets and how the PIMCO GIS Dynamic Multi-Asset Fund (DMAF) is positioned.

From the desk of Geraldine Sundstrom, Friday 7th June 2019.

The central banks of the world have taken a resolute dovish turn, some with more room for manoeuver than others. The ECB promised it is « ready to adjust all instruments » but still failed to impress. Some other central banks like Australia, New Zealand and India went as far as cutting rates. Finally the entire array of Fed governors gathered in Chicago for a monetary conference and went all out dove hinting heavily that an insurance cut by the Fed is almost surely on its way. The bottom line of it all, is that central banks around the world are all joining the easing band wagon that the PBOC launched last year.

Markets loved the news and both safe government bonds and risky assets from equities to credit spreads enjoyed the news; all the more than the trade tensions between the US and Mexico seemed to have eased.

However there is a gap worth mentioning. The US/China trade war is still ongoing and the global economy is already nearing stall speed. Given the uncertainties surrounding the trade war, the tech war and an already very fragile global economy it is very unclear if the central banks’ pivot will be enough or too little too late... For sure lower interest rates can help support risky assets’ valuations but an economy that slows too much and a potential corporate earnings recession will be the overpowering force in the end.

The bad economic news seems to keep coming: the global manufacturing PMI fell 0.5pt to a mere 50.1, a full 2pts below historical averages and the lowest since 2016. The World Bank has lowered its global growth forecast for 2019 by 0.3% to a paltry 2.6%. The Bundesbank revised down its GDP forecast for Germany by 0.6% and industrial production saw its biggest plunge in 4 years. Finally the all too important US non-farm payrolls came at a low +75k amid negative revisions to previous months and lower than expected average hourly earnings. On a completely different register but nonetheless concerning, US oil stockpiles grew the most since 1990 on a combination of too high production and muted demand.

The burning question when contrasting the soothing news of central banks dovishness and global economic data points is : will cuts turn out to be « insurance » to prevent a deep slowdown or is the macro worsening already too severe to avert at the minimum an earnings recession? History shows that central banks cuts manage to push risky prices higher only when they are of the « insurance » kind. If we do get an earnings recession usually it overwhelms the cuts and risky asset prices suffer. Sadly only time will tell and a trade war is also a new element with little precedent and it is yet unclear how it will evolve.

In DMAF portfolios we kept out prudent stance feeling that central banks dovishness, while helpful, risks being too little to save the day especially given valuations that remain elevated. Indeed some of our models point to a worryingly growing discrepancy between EPS consensus expectations by the end of the year and our forecast: it has now reached a magnitude of 15% for the S&P500.

So our equity exposure remains around 12.5%. On duration we also kept 4.5y despite the big rally as current levels are probably a fair weighted average of the economic upside and downside scenario.

Once again the gap between equities and bond pricing remains vast.

Autor

Geraldine Sundstrom

Head of Asset Allocation EMEA

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Data as of 7 June unless otherwise stated.

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