InvestmentEurope caught up with François Savary, CIO and vice CEO at Prime Partners, who shares his cautious outlook on the world economy and reveals how two years on from him joining Geneva-headquartered Prime Partners, the group has adjusted its asset allocation strategy to respond to the current challenges.
For Savary, the key trend defining markets today is a growing process of synchronisation, as global factory and growth data are increasingly converging. “The market is definitely right, most indicators are pointing to a continuation of the trend towards synchronisation, but the big question for 2018 is whether the economy will be able to accelerate further” he stresses.
“Markets are currently moving on the hypothesis that growth will accelerate significantly but I have doubts about that. European GDP is now growing at 2% with a potential rate of growth of 1% further down the road, we are facing a number of demographic and productivity constraints which will come into play and which will affect the ability to accelerate growth” he warns.
“The big question is not if we will head to a 1970’s style inflationary world but what the consequences will be once inflation hits its 2% target. There is always an assumption that the introduction of tapering will be a very smooth transition, I am not convinced. People tend to forget that synchronisation can go both ways” he warns.
According to Savary, there are several key risks to global economic growth, ranging from the structural issues with Chinese economic growth to geopolitical challenges in Saudi Arabia and Russia. Commenting on the long-term impact of the Chinese party congress, he stresses the necessity for the regime to embrace a slower pace of economic growth. “The only way the Chinese leadership can continue to sustain the current pace of economic growth is if they deepen the disequilibrium in the world economy. If they continue to overinvest and spend it will undoubtedly have an impact on the world economy.”
Regarding the situation in Saudi Arabia, Savary stresses the urgency to continue the current anti-corruption reforms initiated by the crown prince and warns that a failure to introduce further reforms could push oil prices up.
For the European project, Savary warns that Macron and Juncker’s federalist ambitions might come at a risk: “They have set the bar in terms of what should happen in 2018, and this assumption that the economy has improved is now priced in, if Europe fails to fulfil these expectations and move forward, it could be very very dangerous, it leaves no room for disagreement between European member states” he warns.
Currency effects
Shifting geopolitical alliances also leave their mark on global currency markets, as Savary points out, with the most noticeable change being the ongoing depreciation of the $, which for him does not come as a surprise. “The $ is simply coming back to reality, the reality is that Trump has not delivered, his tax reform is basically just a tax cut and in the short term it will be negative for the $ because it will have an adverse effect on the current account deficit” he argues. “We reduced our $ exposure back in December and continue to belive that in 2018 the $ will further weaken against the euro” he predicts.
Being based in Geneva, the gradual normalisation of CHF exchange rates has also been tangible for Prime Partners. “The CHF remains a traditional safe haven currency and has in some ways been affected by the stabilisation of the outlook for the Eurozone, which led to a reduction in demand for CHF” he argues. “We think there is still room for the CHF to depreciate further” he predicts.
Portfolio plays
How then affects does this outlook affect the group’s portfolio positioning? “We believe synchronisation is going to continue but managing risk will become more important, this is why we keep our equity exposure stable but we are moving money from credit to alternatives. In 2016 when I joined we made a huge bet on high yield for Europe and Emerging Markets. We are currently reducing these assets and are moving the money instead into alternatives such as long-short strategies, which we now use as a substitute for riskier bond investments.”
In terms of currency exposure, he says: “We have reduced our CHF exposure and increased our euro position a little bit, we have also increased our exposure to Swiss companies that are exporting, and therefore benefit from the cheaper CHF, such as Novartis and especially Roche, which has been suffering, from our point of view, excessively.”
