Investment Insights

Global Asset Allocation: February Insights

Yoram Lustig, CFA, Head of Multi-Asset Solutions, EMEA & Latam



Pandemic Threat

The coronavirus outbreak has become a worldwide health crisis, impacting lives across the globe. The uncertain extent of the outbreak has caused a sell-off in risk assets. Many have compared this health emergency with the severe acute respiratory syndrome (SARS) outbreak in 2002–2003 but note stark differences in the increased size of the Chinese economy and how integrated the country is in supply chains worldwide. Another key difference is that the MSCI All Country World Index (in USD) had lost nearly 20% in 2002, just before SARS, compared with a 27% surge in 2019, putting today’s market at risk for a larger correction. As the virus continues to spread, it remains to be seen if it will be a temporary shock to the global economy or have more long-lasting impacts. While China’s initial steps to support its economy may provide temporary relief for the markets, volatility is likely to persist around the news flow.

U.S. GDP: Consumer Getting Frugal?

U.S. gross domestic product (GDP) growth for Q4 2019 came in at 2.1%, matching estimates and potentially solidifying investor confidence in the improving global growth narrative. Net exports led the way due to an unusual and temporary 9% plunge in U.S. imports, resulting from the trade war. It is important to note that the tariffs simply reduced U.S. demand for imports, which increased net exports, as opposed to an increase in U.S. exports and production as the catalyst. Continuing to look under the hood, the steady headline number may be masking some soft spots in consumer and business spending. With tax cuts and government spending from 2017 and 2018 now behind us, the economy has been reliant on the U.S. consumer to buoy the markets. We have now seen consumer spending moderate over recent months, and while it is hard to call it a trend at this point, it is certainly worth watching, particularly as unemployment remains low and wages are improving.

Back in the Game?

At its January meeting, the Federal Reserve (FED) kept interest rates on hold but stated that it would take measures to combat global disinflation, implying a dovish path for rates. With the coronavirus outbreak threatening to stifle global growth, market sentiment indicates that the Fed may need to step back in, now pricing in at least one rate cut by the end of 2020. Amid the dovish shift in sentiment, the three-month to 10-year part of the yield curve has inverted for the first time since October 2019, further signaling fears that the nascent recovery in growth may stall. While acknowledging that the Fed is closely monitoring current risks, Chairman Jerome Powell indicated that it would take a longer-term threat to growth to reengage the Fed. While hopeful the virus outbreak crisis proves temporary, markets are at least suggesting that the Fed may need to get off the bench and start warming up.

For a region-by-region overview, download the PDF.

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