Weekly View – Game of chicken

The CIO office’s view of the week ahead.

As a US-China trade negotiation impasse became evident last week, markets corrected a bit, particularly cyclical sectors. Given the strong US economy, Trump is feeling empowered to pursue his agenda, raising existing tariffs from 10-25% on USD 200bn worth of goods with immediate effect and threatening more. Now we will wait to see how China retaliates. For the time being, we feel assured that the Chinese authorities will not use currency or its US Treasury holdings as a weapon, although escalation otherwise is to be expected. So far both sides have found alternative sources for the goods impacted by tariffs (e.g., China is importing soybeans from Brazil) but as the tariffs move up the value chain, it will become increasingly impossible to do so. We still believe a solution will be reached, but the risk of an accident has gone up.

Given the market correction and volatility spike, we are holding on to our protection in portfolios. What is interesting in this sell-off is that investors are hiding in US Treasuries (which we are neutral on) and German Bunds, but not European bonds more broadly, including peripheral government bonds. Only German bonds are behaving as a safe haven asset within Europe and we remain underweight European bonds and prefer to play quality in credit for this reason.

Uber’s initial public offering (IPO) last week followed a series of large IPOs of loss-making companies that the market is unenamoured of, with its share price falling 8% from the offer level on the day. This is a reflection of investor sentiment and a bias in the market with participants more sensitive about what they buy. We continue to focus on pricing power companies with no leverage as free cash flow will be increasingly rewarded in the current point of the cycle.

César Pérez Ruiz, Head of Investments & CIO

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