The US economy continued to show signs of underlying strength, with the Q1 GDP numbers coming out at 3.2% against an expected 2.3%. With unemployment low and inflation stable and contained, alongside a Federal reserve that seems to have softened its monetary policy normalization, markets only really have two things to fear – an escalation of the US-China trade war, and the fact that a US slowdown is inevitable.
In the meantime though, the economic outlook is sufficient to keep markets happy, with equity markets continuing to rise, seeing the MSCI All Countries Index rising 3.2% in April. It is however important to note that it is the US equity markets that continue to outperform, and from a sectoral perspective, the tech components are driving the positive performance. This in turn makes markets more susceptible to issues that effect the global trade outlook.
With that backdrop, the US dollar continues to be strong – and has been strong for longer than what most have expected, especially with the more dovish Fed in the limelight. Noteworthy though, it is also the relative positioning of the other major economies (the Eurozone in particular) that has helped the dollar to remain a safe haven. In Japan, the BOJ will have to deal with a stubbornly low inflation rate, and may have to resort to further stimulus if they wish to get anywhere close to the targeted 2% level sustainably. This overhang also lends itself to the dollar-yen dynamic continuing to favour the dollar.
We regard equities as reflecting fair value given earnings growth prospects (starting to slow) and the relatively low cost of capital. On this basis we are comfortable in maintaining a relatively neutral stance. We anticipate that bond yields and inflation will drift slightly higher and our bond exposure is relatively short duration.
Inflation linked bonds look somewhat more attractive and we are likely to gain some exposure here depending on pricing going forward. Real estate has been performing exceptionally well of late and given our view of rising bond yields we decided to take some profit.
In FX we retain overweight positions in the Yen as it is regarded as fundamentally cheap with strong risk diversification properties. In anticipation of a steepening yield curve we have adopted a positive view on the financial sector and have added a small thematic position to the funds.