Two weeks ago, global equity markets grazed new highs in local currency terms, thanks to progress made on the US-Mexico trade talks front. Given that hostilities between the US and Europe are suspended for the moment and that President Trump appears willing to accept a compromise in the context of the NAFTA negotiations, the only persistent source of trade tensions appears to be China. This is encouraging, but we still see various risks. First, the US threat to impose tariffs on auto imports is still there. Second, the new NAFTA deal has not yet been finalized in detail. Third and lastly, the friction between the United States and China does not concern only the sphere of trade and the White House still seems willing to impose tariffs of 10-25% on Chinese goods worth 200 billion dollars. A trade war, even just between the United States and China, could be enough to destabilize the markets and jeopardize world growth in the last months of the year.
Conclusion: progress on the commercial negotiations front seems encouraging to us, but the details of the new agreements have not yet been defined. We maintain broadly neutral risk exposure in our global tactical asset allocation.
YOU ARE READY?
Fears over trade tensions continue to be the most important risk to markets, but by no means the only one. In the latest edition of the Global Risk Radar, we analyze the probabilities of a sharp slowdown in China, an acceleration of the US Federal Reserve's monetary tightening and a spike in oil prices. We recommend taking advantage of the current period of relative calm on the markets to identify weaknesses in your portfolio and take the necessary measures. In particular, we recommend diversifying positions globally, reducing credit risks, taking downside protection, investing in structurally driven instruments and increasing exposure to alternative sources of returns, such as hedge funds.
Conclusion: in the latest Global Risk Radar, entitled «Are you ready? Risk scenarios for the near future», we present five strategies to reduce vulnerable portfolio positions.
LOCAL FACTORS CONTINUE TO MOVE EMERGING MARKETS
The Argentine peso fell 14% in the last three days of August, after President Mauricio Macri asked the International Monetary Fund (IMF) to speed up the disbursement of funds under the ongoing economic aid programme, and the Turkish lira lost 4% after the central bank again avoided tightening money. While both countries suffer from local problems, the weakness of their respective currencies shows that some emerging economies are vulnerable to US rate hikes and dollar strength. The JP Morgan Emerging Market Currency Index fell 2% last week, bringing the year-on-year decline to 12%. Therefore, we don't think it's the right time to increase exposure
emerging markets: The depreciation of the peso, lira and South African rand illustrates the dangers of chasing emerging currency yields in such an environment.
Bottom line: We are broadly neutral on emerging market high-yield currencies and equities. However, we see value opportunities in USD emerging sovereign debt, a diversified asset class that offers a good yield of 6,5% and is relatively protected from a strengthening dollar.
