It's hard to imagine the European Central Bank rushing to the rescue of Europe's economy just when it has wound up its asset purchase programme. Nor will there be a great deal of help forthcoming on the fiscal front, with Italy and France constrained by deficits that are already slipping off-limits.
In China as well, the government has only limited room to manoeuvre. Its policymakers have certainly taken a number of steps to prop up the economy, including a recent substantial reduction in reserve requirements for banks. But the obstacles to greater stimulus are becoming more serious all the time.
In the United States, the lack of progress in talks between President Trump and the new Democratic majority in the House of Representatives has already led to a shutdown, with ordinary Federal government operations no longer being funded. The only hope left is therefore that the Fed will opt for a softer monetary policy.
Jay Powell hinted that he might be more flexible on policy, but he made no commitment to do so. In a word, there are no compelling grounds today for the Fed to "capitulate" on monetary policy. At the same time, the increasingly tight labour market is gradually pushing up wages and thus beginning to eat into profit margins. That suggests that disappointing corporate earnings are in the offing - particularly as the economic slowdown discussed above gains traction.
- We are maintaining our investment focus on growth stocks that look good from both the financial and the valuation perspectives.
- We continued to scale back our exposure to hyper-growth stocks, particularly in the software industry.
- Significant cash holdings give us the leeway we need to take advantage of attractive points of entry. As of early 2019, for example, the share price of JD.com - China's second-biggest online retailer after Alibaba - had lost half of its value in less than a year, although the company boasts high-quality fundamentals and sales numbers that are fairly close to previous guidance.
- We have continued to actively manage the overall modified duration of our Funds, which we recently increased in response to stock-market volatility and the economic slowdown observable in Europe and China.
- We are uncertain about where US Treasury yields are heading. We therefore plan to tread cautiously with respect to US bonds and give precedence to Asian and European debt.
- With the global economy losing momentum, we are maintaining only moderate exposure to emerging-market bonds despite the attractive valuations in specific sectors.
- The exchange rate between the two main currencies, the euro and the US dollar, stayed within a narrow band throughout the quarter. In managing our portfolio risk, we have continued to favour the euro and, to a lesser extent, the yen over the dollar.
- The greenback is hampered, as before, by a rising fiscal deficit and the first signs of a slowing US economy. The Fed's recent signals of a more flexible approach offer additional evidence for that view.
- Meanwhile, EM currencies remain a relatively vulnerable asset class as the global economy slows further and the Federal Reserve forges ahead with its drive to deflate the liquidity bubble.
Didier Saint-Georges is managing director and member of the Investment Committee at Carmignac