Note: Any reference to portfolio positioning relates to our flagship discretionary portfolios. Clients with bespoke or advisory portfolios should consult their Client Advisor for their latest positioning.
What you need to know
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During our recent rebalancing, we opted for a ‘roughly neutral’ equity stance in lower-risk profiles and a slight overweight in riskier ones instead of fully reinstating our previous overweight. This helped us benefit from the equity recovery in late April and early May. So, with equities appreciating, we are now slightly overweight. We are comfortable maintaining this overweight position, given the easing of trade tensions, including the recent US-China trade agreement to lower tariffs for an initial 90-day period.
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We’re buying Japanese equities due to solid earnings growth, corporate governance reforms, and possible progression in trade talks with the US. As the Bank of Japan is likely to continue to raise rates further down the line, the yen might strengthen, so this could boost any gain when translated into euros. We are funding this move by selling some of our broad US equities and Treasuries. This helps diversify portfolios away from the US dollar, which we think is overvalued, and also exchanged some US equities for a version that’s protected from euro/dollar currency moves.
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A few weeks ago, we bought global high-yield bonds using cash that we had kept to deploy once opportunities arose. The difference in interest rates available in high-yield bonds compared to safe government bonds (known as the ‘spread’), which was very tight a few months ago, therefore making valuations unattractive, has widened in recent months, which is why we believe the additional returns available in high-yield bonds are worth the extra risk.
Daniele Antonucci
Daniele Antonucci
Daniele Antonucci is a managing director, co-head of investment and chief investment officer at Quintet Private Bank. Based in Luxembourg, he jointly chairs the investment committee, owning decision-making and performance outcomes. As head of research, Daniele oversees the investment strategy feeding into portfolios and the teams of specialists across asset classes and solutions, ranging from macro, fixed income and equities to funds, alternatives, and structured products and derivatives. He leads the network of chief strategists, communicating the house view on the economy and markets to financial advisors, clients and the media.
Prior to joining Quintet in 2020 as chief economist and macro strategist, Daniele served as chief euro area economist at Morgan Stanley in London. He completed the High Performance Leadership Programme at Saïd Business School, University of Oxford, holds a master’s degree in economics from Duke University and graduated from the Sapienza University of Rome. Featured in The Economist and Financial Times and often quoted in the generalist press, he’s a published author in finance and economics journals and investment magazines, a frequent speaker on CNBC and Bloomberg TV, and an ECB Shadow Council member.
The back and forth of trade tariffs
US trade policy, with tariffs being announced and (temporarily) repealed, and uncertainty around potential trade deals, is what has kept volatility elevated. Economic and market pressure has pushed the US Administration to adopt a softer stance, opening the door to negotiations and tilting the balance of risks towards de-escalation rather than further escalation. This has been a relief for markets, which rebounded recently. The latest piece of news is that the US has reached an agreement with China. For the next 90 days, the US will lower tariffs on China to 30% from 145%, and China to 10% on US imports from 125%. We think this is a positive development for markets, even though it’s temporary at this stage and doesn’t bring tariffs back to their level prior to the start of the trade tensions. However, the stagflationary impulse (lower growth and higher inflation), while less strong, hasn’t fully disappeared.
Our research has focused on the key driver of US policy sequencing. We are seeing a negative impact of tariffs up to this point, but we expect a positive impact from tax cuts and deregulation further down the line. While the former has obviously spooked investor, business and consumer sentiment, the latter should be a tailwind for the global economy and markets. The rest of the world is likely to see government spending, too, alongside interest rate cuts, especially in the eurozone, where inflation is lower than in the US. So, our strategy focuses on mitigating downside risks, while positioning for upside opportunities ahead.
Diversifying from US assets and the dollar into Japan
Earnings growth in Japan is holding up well and we think the stock exchange and corporate governance reforms are underappreciated by the market. Japan is also actively engaged in negotiating a trade deal with the US. These should all support Japanese equities, so we’ve decided to buy some, going overweight.
In addition, following a long period of deflation, inflation is rising in Japan, meaning the Bank of Japan is the only major central bank that’s raising interest rates. This is likely to support the yen, which is currently attractively valued. We believe the yen could appreciate, partly supported by Japanese investors refocusing on their market (which they typically do when uncertainty rises), resulting in stronger gains when translated into euros.
We’re funding the Japanese equity purchase by selling some broad US equities and Treasuries, which also helps diversity away from the US dollar, which we believe remains overvalued from a long-term perspective given its fiscal and trade deficits. In the nearer term we see foreign investors less keen to buy dollar-denominated assets, potentially weakening the currency. As a way to play the weakness of the US dollar, we also swapped some ‘regular’ US equities for a version that’s protected against shifts in the euro/dollar exchange rate.
Capturing extra return in equities and yield in fixed income
A few weeks ago, when we rebalanced our portfolios, I decided, together with our Investment Committee, not to go all the way to our previous equity overweight. We stopped at ‘roughly neutral’ (in lower risk profiles, while slightly overweight in riskier ones). This positioning captured the recovery in equity markets through the latter part of April and early May well. The recovery now brings us back to a small overweight equity position, which we feel comfortable holding onto given the ongoing de-escalation in trade tensions that’s currently unfolding, with the temporary US-China trade agreement a further positive development. In recognition that risks remain at lower, but still elevated levels, our equity overweight is moderate. Plus, we’re maintaining the US equity warrant, an ‘insurance’ instrument that appreciates when US equities fall (where client knowledge and experience, and investor guidelines and regulations, permit).
During our rebalancing process, we decided to keep some cash. Our view was and still is that cash returns will be lower going forward due to the interest rate cuts we expect, so we wanted to use that cash if an opportunity were to arise. That opportunity presented itself in high-yield bonds. We’ve long held a reduced exposure to high-yield bonds because valuations weren’t compelling. The difference in high-yield interest rates compared to safe government bonds (known as the ‘spread’) was too low to warrant the extra risk. But now, spreads have widened to a level we think offers a reasonable compensation for the risks. So, we’ve recently raised exposure to high-yield bonds to a more neutral stance, funded by cash. We believe this position will help capture a higher yield in portfolios, but moderate sizing ensures the risk/return trade-off is appropriate for our strategy.
How we’re positioning our strategy in the face of volatility
We’ve argued before that liquidating one’s investments at a loss when markets fall and attempting to get back in the market later on, inevitably paying a high price, makes limited sense. Rather than ‘timing the market’, we think it’s often more sensible to spend ‘time in the market’, compounding return and staying diversified across regions and asset classes. In this way, a wobble in one part of the portfolio (say, equities or corporate bonds) can be offset by a gain elsewhere (say, gold or government bonds, which tend to appreciate when uncertainty rises).
Importantly, this doesn’t mean staying static. Rather, active portfolio management is a key pillar of our investment strategy. So, recognising that US equity valuations are still on the demanding side, especially in technology, we continue to like our diversification strategy away from broad US equities and into an equal-weight US index. The index gives a higher weighting to more attractively valued sectors, such as US industrials and financials, which could also benefit from trade protection, fiscal stimulus and financial deregulation. More recently, given our expectation of extra spending in defence and infrastructure, we bought some European equities.
Finally, we combine our moderate equity overweight, which is designed to capture growth, with an overweight in short-dated government bonds, a defensive positioning to mitigate risks. And we prefer European high-quality corporate bonds to their US counterparts, also underweighting US Treasuries as we think a high government debt level is a risk. We stand ready to adjust positioning and mitigate the impact of tariff uncertainty on portfolios while also aiming to capture opportunities when trade de-escalation becomes more permanent, and policy stimulus materialise.
If you have any questions about our latest market views or portfolios, please speak to your Client Advisor who will be happy to help.
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