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Overview of 2019 second quarter

At the beginning of the year, as written in our previous document “Summary 2018 and Outlook 2019”, we did not share the very pessimistic view of others concerning economy and financial markets. For 2019 we anticipated a changing world more brutal but no only have bad economic and political events. Risk premiums (equities and credit spread in particular) appeared quiet attractive to us. Accordingly our portfolios were positioned less risk adverse and so they benefited from the strong market rebound in the first quarter. This uptrend movement, which was notably expressed by increases of 10 to 15% for main equity indices, is explained by a resilience of the world economic pace, by hopes of resolving the various political conflicts and especially by the communication and acts of the central banks , FED and ECB.

During the second quarter, although the trend remained broadly well oriented in the financial markets , we had a upward movement on stocks and a compression on credit spread plus a decrease on yield. , the rises were more modest than during Q1.   It  has been  a good surprise and a period on consolidation  The main equity indices are up around 4% over the quarter. The environment was more difficult due to a stronger volatility feeding doubt and cautious attitudes than in the first quarter, especially in May. Once again, the resurgence of political risks and mainly commercial tensions between US / china , US Europe , brexit  has pulled the financial markets out  and investors started to take more in account real economy and not only   “monetary” euphoria . Monetary euphoria mainly do ti a large injection of liquidity. The relations between China and the United States, which seemed to have eased, were indeed sharply tense at the beginning of May and trade tensions are now adding a “technological” war after the US administration’s decision to close the access to US products and patents to Chinese telecom equipment manufacturer Huawei. Added to this is an absolute blur over Brexit even after to year , the smog is more and more dense ,  and a rise in geopolitical tensions in the Persian Gulf.

 

Today, this context is having a very strong impact on companies’ morale and outlook  and   certainly on economic propects for states and enterprises , as evidenced by the sharp decline in the latest confidence indicators. The spring uncertain environment, more these tensions and the “commercial” conflict between the two major world economies, if it were to continue, would inevitably have very negative economic consequences. Brexit , tension with Iran , bad relation between US and China , the European election to come , the new Brazilian president …all that is freezing investment , forecasts and so it has and will have a negative impact on growth and on inflation. These concerns were, at the end of the quarter, widely relayed and shared by the central banks, BCE and Fed in particular and BOJ and finally BOC. Their attitude has changed,  now  they are ready to relax their financial policies and inject liquidity and or decrease interest rate if needed , marking a 180 ° turn compared to last autumn. As a result, reference sovereign debt rates continued to decline. The 10-year-old is below the 2% mark for the first time since the end of 2016. The German 10-year-old ended the half-year at -0.30%, breaking the historic low point of June 2016 (-0.20 %). This low interest rate environment continues to fuel demand for higher-paying assets (private debt, equities, etc.). But the question is ; can it be sustainable ?

Risk premiums, which today include very significant monetary easing, seem to us much less attractive than at the beginning of the year. There is no doubt that in the coming months, the political and macroeconomic uncertainties will continue to fuel the nervousness for investors , volatility , illiquidity on financial markets and for businesses it will drive to a cautious attitude  despite the benevolence of the central bankers.

We remain confident but very cautious about equities and will seize opportunities on stocks that occasionally experience weaknesses or attractive returns.

Cyril Deblaye

31 july 2019