Global Macro

Recent weeks have seen growth optimism alternate with spikes in risk aversion. Unsurprisingly, financial markets have been subject to greater ups and downs than in past months as they were unnerved by the tensions between North Korea and the USA, while welcoming confirmation of continued strength of the global economy and still moderate inflation. In a reflection of that mixed sentiment, global bond yields continued to decline in August, while equity prices essentially moved sideways.

Gold gained ground amid the geopolitical tension and lower bond yields, while the hurricane season impacted energy prices.

In light of the opportunities and risks, we confirm our neutral allocation to global equities and our positive view of the Eurozone, Swiss and Australian equity markets. Yet we reduce our view on UK equities to negative. Our other allocations – neutral on fixed income, positive on commodities – are unchanged as we continue to believe in a positioning that seeks broad diversification and exposure to attractively valued pro-growth assets.

The global economy is still growing at a robust pace. The latest macroeconomic data suggests that we can expect this trend to continue and exert a positive influence on equity markets.

However, stock market prices around the world are no longer low, and geopolitical tensions have recently increased. At the same time, financial markets do not seem to be too worried because the cost of buying insurance is low. Against this backdrop, we have decided to protect some of the gains in line with our cautious approach during this time of the year. Since the US equity market has already advanced by more than 10% this year, we have used specific put options to hedge part of our US equity market exposure. We think it is a good time to do so because volatility levels, which are an important factor for the price of an option, are low so that we were able to buy insurance at an attractive price. Using this protection, we are keeping our allocations mostly unchanged to maintain the upside potential in our portfolios.

S&P 500 Historical Volatility Spikes Up