MONTHLY INVESTMENT OUTLOOK - by Cédric Ozazman, Nicolas Besson & Marco Bonaviri

(Only in English)

The International Monetary Fund (IMF), under its new Chair Kristalina Georgieva, has slashed 2019 growth prospects to 3%, the slowest rate since the global financial crisis. Rising trade tensions and depressed manufacturing activity are the main culprits of the fifth straight 2019-growth downgrade by the institution. Given the state of the latest leading indicators (such as ISM surveys), which are still indicating an improvement, the downbeat revision did not come as a surprise. However, when digging into the details of the report, the interesting part comes from the positive effect of monetary stimulus. According to the IMF, global growth would be 0.5% lower in both 2019 and 2020 without such initiatives. Put differently, this means major central banks have been successful in mitigating the negative side effects of tariff hikes imposed by the US to China, hence acting as a counterbalancing force.

Will it be enough to avoid a global recession in the next six months? This is likely, but the probability of such a negative scenario has increased as the global outlook remains precarious given the high level of geopolitical uncertainties surrounding the world. In this regard, positive developments have emerged from the last meeting between China and US, with both parties agreeing to a (temporary) truce, which translates into a suspension of a subsequent tariff increase in October. Nevertheless, the deal is fragile and the reality is that the current situation has not changed from a couple of months ago because the only real positive news is the absence of further escalation. Ahead of the 2020 US election, President Trump might be forced to ease his rhetoric, as he cannot afford a US recession, which will ultimately lower his chance of a re-election. However, divergences between the two nations are still wide and filling the gap will not be an easy task.

Another source of uncertainty comes from the Brexit situation. The deadline is looming (31st of October) and based on the latest information, Boris Johnson has struck a deal with Europe. Final hurdle is a major one, as the UK Prime Minister needs to get the majority in the House of Commons. His Irish allies will likely not support the deal, hence reducing the chance to get a smooth Brexit. 

A poor economic environment, coupled with negative world EPS growth and high geopolitical uncertainties did not prevent risky assets, namely equity indexes to climb the wall of worries, reaching 2019 highs. Even if positive outcomes such a Brexit deal or even a US China deal might materialize in the coming weeks, the risk/reward of chasing equities at current levels is not attractive, particularly given the high valuation level, entering the expensive zone, like in April and July 2019.

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