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INVESTMENT DIRECTIONS

Pressure drop

Christopher Dhanraj |Nov 15, 2019

Our reference to the classic Toots and the Maytals song comes as we see a de-escalation in trade tensions with China, diminishing risks of a no-deal Brexit and few signs that the record U.S. economic expansion is ending or reversing. Still, persistent trade uncertainty is denting business confidence and spending, particularly the longer-term risk of an unravelling of the global supply chain. Our take on the major investor themes for the weeks ahead:

U.S. equities: Sector steering

Defensive sectors have outperformed cyclicals this year against a backdrop of slowing growth and falling interest rates. However, we expect central bank easing could provide a floor for growth in the coming months. Among cyclicals, we remain constructive on technology, while we prefer less rate-sensitive sectors such as healthcare among defensives.

Developed markets: Winter of our discontent?

Trade uncertainties and slowing growth have taken a toll on developed world stocks outside the United States. But not all DMs are created equal, and there are signs that the global growth slowdown has hit bottom, while central bank easing could help. We are neutral on Europe and underweight Japan.

Emerging markets: China’s mixed outlook

A temporary trade truce with the United States provided some optimism around China over the last month. However, China’s growth slowdown has become more pronounced. Investors may want to consider EM ex-China exposures to hedge out the risks associated with a Chinese slowdown and any potential negative trade news.

Fixed income: Seeking defense in credit

U.S. government bond yields have responded to geopolitical risks over the past few months both ways, which underscores bonds’ important role as a diversifier. Meanwhile, investment grade credit continues to lead sectoral performance, supported by easing financial conditions, a still-growing domestic backdrop and investors seeking high-quality yield. An up-in quality approach may allay fears over potential downgrades.

Factors: Value, the comeback king?

We remain in an unfavorable environment for value, given slower growth and the return of “lower-for-longer” interest rates. Still, our outlook for value has improved and now stands at a neutral position as relative valuations appear quite cheap. Our outlooks for minimum volatility and quality have similarly improved.

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