Weekly View – Still going on and on

The CIO office’s view of the week ahead.

Chinese equities stole the show last week on optimism over US-China trade negotiations and MSCI’s decision to gradually increase inclusion of Chinese A-shares from the current 5% to 20% in 2019. This will bring China’s weighting in the MSCI Emerging Market (EM) index to 3.3% in November from its current 0.71%, translating to up to USD 125 billion of Chinese domestic equity inflows this year. Market participants reacted positively, despite a weakening Chinese macro picture, with deteriorating indicators in manufacturing suggesting further economic deceleration in Q1. We are optimistic that the Chinese government stimulus combined with President Trump’s determination to secure a trade deal will ultimately bode well for Chinese markets this year and bought Chinese equities in portfolios.

Markets interpreted a number of UK politician moves last week as decreased risk of a ‘no-deal’ Brexit at the end of this month. Within a 24-hour window, Labour leader Jeremy Corbyn confirmed his party’s support for a second referendum and Prime Minister Theresa May committed to a sequence of reassuring votes. Should her deal fail to secure parliament’s backing on 12 March, May has promised a vote to rule out a ‘no-deal’ Brexit on 13 March, followed by a vote to extend Article 50 on 14 March. Markets rejoiced, with UK gilts selling off and the pound reaching highs against the euro last seen in 2017. In equities, the domestic market-oriented FTSE 250 delivered a modest positive return. We believe a no deal will be avoided but are underweight UK equities given the damage the heightened uncertainty has already done to UK manufacturing investment. 

Geopolitical news delivered a number of surprises last week as tensions between India and Pakistan quickly escalated and then de-escalated on Friday after Pakistan released a captured Indian pilot. Farther east, the US-North Korea summit in Hanoi ended abruptly and anticlimactically on Thursday. Negotiations seem to have made limited movement in either direction. Markets took little notice and equities continued to edge higher as company earnings and guidance were overall better than expected. We took the opportunity to take profits on global equities, reinvesting part of the proceeds into EM local currency bonds. 

César Pérez Ruiz, Head of Investments & CIO

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