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SystematicEdge: Monthly Market Overview November 2019

02 December 2019

MARKET CONTEXT: 2020 economic scenarios dependent on geopolitical decisions 

  1. Global Macro: The 2020 OECD GDP forecasts are: World 2.9%, US 1.9%, China 5.7%, and Europe 1.1%. The economic growth has slowed down around the world and the manufacturing sector in developed economies is now in recession. The service sector has slowed down but is still slightly expanding and most of the economic growth indicators (e.g. PMI, industrial production) have stabilized. If this continues, it will underpin the current positive market risk sentiment in a context of accommodative monetary policy, low unemployment and decreasing extreme geopolitical risks (for now). The continuation of this moderately positive scenario will depend on political decisions such as the implementation of trade agreements by the US and the UK. Also as central banks are already in strong accommodative mode, it will be up to the governments around the world to engineer the proper economic stimulus to avoid recession and control the process of the end of the cycle’s soft landing.
  2. Financial Markets:  In November, developed market equity and credit progressed (SP500 +3.8%) while these risky asset classes in EM and China declined (Hang Seng -2.11%), caused in part by Trump disrupting the trade war negotiations by signing the US law backing the Hong Kong protesters. USD strengthened (EURUSD -1.23%, AUDUSD -1.64%) and the market price momentum and risk sentiment are both positive. Oil rebounded 8% and gold retreated 3.3%.  Flows: After 2 years of continuous redemptions of non US equities, investors started to invest in Europe & Asia as equity valuations are more attractive than in the US.  Central banks keep on buying Gold (e.g. China, Turkey, Russia, Uzbekistan, Poland) as the USA disengages from the international political scene. 25% of investors are considering adding gold into their portfolios over the next six months.
  3. Risks:  Trade war: we should see progress as both sides need the start of a resolution to move forward. Yet there is little visibility of what will be done and when. Brexit: waiting for an implementation schedule. Corporate earnings: there could be serious negative surprises due to the impact of the Trade war and Brexit.  Risk Management: Due to the unpredictable outcome of the Trade War and Brexit, the portfolio has minimum exposure to the down side and positive optional exposure in both Equity and Safe Havens (US Treasuries & Gold).
  4. Opportunities for 2020:  The SystematicEdge investment strategies are designed to harvest high income across diversified asset classes and preserve capital regardless of the realized scenarios.  Common variables across our scenarios: low steady inflation and accommodative central banks (i.e. low short term rates for longer).  See below for the scenario analysis for 2020.