MARKET INSIGHT SEPTEMBER 2019 - Prime Partners SA
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MARKET INSIGHT
SEPTEMBER 2019
Market Analysis
September 201 9
Heatwave and summer storms spread to
the financial markets
“While the sun shines and markets are back up, it not enough to power a smooth and enduring
may be wisest to ride the current, and yield to the advance in the equity markets.
siren song of exuberant optimists.”
Against this backdrop, a lacklustre earnings
That was the irony-tinged message of season and the introduction of fresh tariffs on
watchfulness we left you with in our June Chinese goods by Donald Trump served as the
commentary. The resurgence in volatility and a catalyst for a correction in equities and a shift into
consolidation in the equity markets over the safe havens such as gold and government bonds.
summer proved our approach to be the right one. Those investments were also buoyed by
mounting fears of an imminent global recession.
This was firstly the case because we faced the
headwinds of August underweight in equities; That point has become a crucial factor shaping
secondly, because our policy of adding to our the financial outlook for the next 12 to 15 months.
positions in gold on any weakness over the past For our part, we are still inclined to believe that
few months paid off and, lastly, because our fears of a recession are overdone. Our economic
decision to recommend liquid, uncorrelated outlook has not changed. Granted, certain
strategies broadly held its own, too. sluggish figures and the threat to expansion
posed by the trade war should not be overlooked.
“We are still inclined to believe that fears of a recession are overdone”
FRANÇOIS SAVARY, CHIEF INVESTMENT OFFICER, PRIME PARTNERS
It is always important to own up to your mistakes, However, the dichotomy evident in numerous
and we look back with regret at our unduly economies between segments driven by brisk
negative stance on government debt, which has domestic trends and more outward-facing
performed remarkably well over the summer – in segments continues to suggest that growth may
stark contrast to our expectations. stabilise over the next few months.
Ultimately, we are now emerging from this period Are we being wildly optimistic? Far from it. We
of storms in the markets with healthy see a limited, but nonetheless significant
performances, because their volatility has probability (25%) of a recession arising in 2020.
remained in check. That point deserves to be When we talk about managing the risk factors in
highlighted because the aim of our investment our investment policy, that’s exactly what we
strategy since the beginning of mean! What could prompt us
the year has been to manage to revise up the risk of a
the global risks we face. The recession?
fact that events have played
out in keeping with one of the A shift towards greater
main strands of our investment protectionism is clearly one
strategy is reassuring. factor. If the United States
were to continue moving in its
The resurgence of volatility in current direction of more
risk assets – as reflected by the trade tariffs, we would have to
spike in the VIX – is something factor this into our global
we expected, given the degree growth outlook.
of euphoria that overcame
investors in June. As we Likewise, if the White House
mentioned at the time, liquidity hawks were to force through
alone – through a further use of currency depreciation,
easing in monetary policy – is we would have to change our
outlook accordingly.
September 201 9
And what about monetary policy? There’s no The release of the latest European PMI figures
doubt that a shift towards monetary easing is backed up our decision not to review our
underway at all the world’s leading central banks. cautious stance on the safest form of debt.
And a U-turn appears unlikely after all the
messages they have been sending out in recent We believe the pressure on credit spreads may
months, as their credibility is at stake. Granted, a spawn opportunities to top up certain
trade deal – even a partial one – between the investments in corporate debt, without losing
Chinese and Washington authorities could affect sight of the fact that this type of asset displays a
the extent of the drive to inject more liquidity, but high level of correlation to equities.
not the principle itself. In our view then, monetary
policy is less of a concern than the others, at least Despite recent events in Argentina and the
for the next three months or so. “unrest” in Hong Kong, we have not altered either
our equity or debt exposure to emerging markets.
Last but not least, political and geostrategic The valuation of equities and debt carry trades
events are an imponderable that we need to remain attractive since emerging equity markets
reckon with and will monitor very closely. We will have lost considerable ground over the summer
tweak our expectations accordingly, where and questions about Argentina have given
applicable. certain investors the jitters.
As the world faces some complex challenges, In the currency markets, the persistent strength
one should refrain to jump to conclusions. On the of the US dollar has prompted us to review our
contrary, our priority is to keep our options open, year-end targets for the euro/dollar exchange
while staying on the course we have mapped out. rate. That said, we still expect the greenback to
That’s precisely what we have endeavoured to lose ground and so we recommend taking
do since the beginning of the year. advantage of its current strength by reducing
exposure.
As you will have gathered already, managing our
asset allocation tactically will remain a guiding As for the Swiss franc, we admit to being
principle for us in the coming months. surprised at its gains of late. The upward trend
has put the SNB in a bind and prompted it to
We have not sat idly by during the market intervene again. The Swiss central bank is more
turbulence of recent weeks. We have seized or less out of other options until fears among
opportunities on various fronts. investors – who regard the Swiss franc as a safe
haven – subside again.
Generally speaking, we took advantage of the
stock market correction by increasing our While the Swiss economy has clearly lost some
exposure to risk assets to a reasonable extent. To of its momentum, we believe it is still worth
begin with, we scaled down the equity hedges playing a downturn in our national currency
that we had put in place. As things stand, that against the euro. That said, the move will be
limited adjustment does not affect our limited, and it does not seem reasonable to think
recommendation of underweighting equities. that the EUR/CHF will go beyond 1.12-1.13 in the
Indeed, the still limited visibility over the short term.
economic cycle warrants precisely that kind of
stance, at least over the short term. Lastly, despite being somewhat overbought after
a significant summer rally, we still like gold. Amid
Secondly, we have increased our exposure to the current uncertainty and an opportunity cost
convertible bonds. These offer what we regard that has melted away to nothing in the heat, the
as appealing features (convexity) for the current outlook for gold remains bright. As a result, a level
phase in the cycle. The equity component of of USD 1,550-1,600 does not look out of reach
these hybrid assets provides a prudent increase over the coming months. So we will be looking to
in equity risk. add to our positions during any periods of
consolidation.
Lastly, our unwavering commitment to managing
risk has prompted us to build up our positions in .
low-volatility equity strategies.
Geneva, 23 August 2019
We remain sceptical about the strong rally in
government bonds amid fears of the
“Japanification” of the global economy.
Prime Partners SA
Rue des Alpes 15
P.O. Box 1987
1211 Geneva 1
www.prime-partners.com
CONTACTS
François Savary
Chief Investment Officer
Jérome Schupp
Equity Analyst
Julien Serbit
Portfolio Manager
Tel +41 22 595 09 97
fsavary@prime-partners.com
jserbit@prime-partners.com
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