Investment Update June 2019

When fundamentals sneeze

The world economy is gradually deteriorating and things are getting worse in a turbulent political environment. This was evident in the latest developments in the trade conflict between the US and China, when on 10 May Donald Trump introduced a further increase in customs tariffs, which China was quick to respond to. In reality, the tariff war is a red herring and the conflict between the two nations is over technology. It is set to last and is likely to cause a crisis of business confidence, as illustrated by the US ban prohibiting Google access for future Huawei smartphones. At the same time, the World Trade Organization (WTO) has sounded the alarm, revising down international trade growth for 2018 and 2019 and forecasting that this will be accompanied by a worldwide industrial slowdown.

Growth figures in the first quarter were surprisingly high, but they should be viewed with caution.

We remain pragmatic. Growth figures in the first quarter were surprisingly high, but they should be viewed with caution. In the US, growth stood at 3,2% in the first quarter of 2019, but this figure should be qualified, as it conceals sluggish consumption, especially of consumer durables, a slump in imports and high levels of company inventories. In May, the minutes of the FOMC meeting revealed that members of the Fed are discussing the possible composition of the institution’s balance sheet so as to be able to adequately respond to a potential economic slowdown.

In China, growth reached 6,4% in the first quarter. This is admittedly a positive surprise, but does not resolve all the difficulties China has been facing over the past few months, including a dip in industrial production, a gradual fall in retail sales and struggling consumer durable consumption, as reflected in the continuous drop in car sales to individuals since July 2018 (according to the website China Automotive Information Net, car sales decreased by 17% in April 2019). And these disappointing figures were published even before Donald Trump hit China with further sanctions. We can therefore expect more economic difficulties from China.

In Europe, the growth rate is as forecast, at 0,4% quarter-on-quarter and 1,2% year- on-year. 

That said, we have noted some worrying signals, such as the general downward trend in the purchasing managers’ index (PMI) for both manufacturing and services. Germany has felt the effect particularly strongly in its industrial sector, as its manufacturing purchasing managers’ index stands at 44,3, falling far below 50, which is the limit between economic contraction and expansion. This is the first time in two years that unemployment has risen (60,000 more unemployed in April). Although there is no objective reason to start panicking, this marks a break with the conditions seen until just recently, which included a labour market that was "solid" in spite of discouraging macroeconomic figures.

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Across the globe, increased trade tensions and lasting industrial weakness prompt us to maintain our prudent allocation by underweighting equities. We are opting for a defensive positioning in bonds, as the correlation with the equity markets has convinced us to underweight credit to companies issuing bonds in euros. We also reduced our exposure to cyclical sectors, switching from overweight to neutral for the energy sector and from neutral to underweight for the information technology sector, and particularly the semi-conductor segment, which is highly dependent on how healthy the global economy is.


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