Weekly View – SHIFTING SCALES
The CIO office’s view of the week ahead.
Oil is on a losing streak. 12 consecutive days of falling prices led to a rise in high yield spreads. Because this decline has been largely supply-, rather than demand-driven and on the front-end of the forward curve, we are not overly alarmed about the long-term prospects of the oil price at this point. However, as a result of these recent moves, US high yield has suffered in particular, putting pressure on financial conditions. This was followed by the Fed taking on a more dovish tone, with recently appointed vice-chairman Richard Clarida delivering cautious comments around global growth and the US economy. This sent the US dollar down and emerging markets up, in a signal that the balance may be tipping back in favour of emerging over developed markets. We took this opportunity to add emerging Asia to our portfolios for the first time in five years.
At the same time, our puts were repriced lower and we took profits. With the risk-off mood sending credit spreads higher, we remain of the belief that equities offer a more attractive risk-return profile than credits.
The news that could not be ignored last week was of course Theresa May’s Brexit divorce deal. After managing to secure an agreement within her cabinet, the prime minister now faces the bigger challenge of securing parliamentary approval after members of her cabinet have resigned and opposition to the deal among both Eurosceptics and Remainers is high. Our scenario has not changed. While the risk of a hard Brexit or no Brexit remain, we think May still has a chance of pushing her deal – or a version of it – through. We are however, taking into account all three outcomes in our investment decisions, as none can be ruled out at this point, and we continue our play on GBP volatility.
César Pérez Ruiz, Head of Investments & CIO