December 2019

Preamble

Victor Hugo said that “Glasses of water have the same passions as the oceans”.
So, it is possible to say that there is as much passion, current, in a portfolio as in the entire
investment universe.
This metaphor stops when it comes to building a portfolio; at this point the desire is to shelter it
from storms, to find only beneficial currents, to avoid negative upheavals.
Any meteorologist can identify “El-Niño”, a hot and upsetting current, when it occurs; but no
meteorologist can predict its occurrence or its intensity.
This is the exercise that the financial forecast is facing right now: reading the short term signs,
scanning the horizon and not relying on the natural rhythm of the seasons.
The end of 2019 and the near entry into 2020 are under the sign of a necessary risk-taking but
with restraint. End of cycle or new growth cycle without going through a recession? That is the
question, that is the challenge and the questions that will remain in 2020.
As the Japanese say when speaking of El-Nino, 2020 will be “Modoki”, which means “similar but
different”.

1. The Economic Cycle

We believe that economic growth will persist in 2020 although generally weak, particularly in
the developed world. Improved Sino-US trade relations will also benefit Europe, especially
Germany, which had seen its economy slow significantly for the same reasons.

PMI Composite

The chart above shows at the “composite” level (Manufacturing and Services) the evolution of
the level of confidence of purchasing managers over the last 24 months.

PMI Manufacturing

The Manufacturing sector shows a more contrasted landscape and clearly indicates that
cyclical stocks will be struggling for a while longer, investment spending is not necessary. We
should expect some nervousness around these indicators.
The consequence for Asset Allocation is a focus on areas of expansion, geographically or by
sector.

2. Profits

Since the start of 2019, the USA and Europe have shown revenue growth but profit slightly up
for the former and down for the latter.
The drop in profits also applies to Japan, China and the Emerging Markets.
Consequently, the Price-to-Earnings ratios will have to be monitored because, in historical view,
the levels are high; changes in interest rates will be amplify the appetite, or absence of, for risky
asset classes.

3. Inflation

Inflation is distinguished by its low level; only the United States has a level above 2%, the
consequence of a fairly tight job market and an increase in Chinese imports.
There is nothing to fear from seeing a sharp start to inflation in 2020. Savers in the Euro zone,
CHF and Yen will still have to fight negative interest rates.

4. Interest Rates

2019 will remain the year of the false start on the front of the US rate hike since, after a sharp
rise at the end of 2018, the rates only knew a way down.
In weak growth we favor the scenario of generalized low rates, in all currencies, and little
change for the next few months.
The yield spreads of the different qualities compared to treasury bills highlight the risk
appetite. Abundant liquidity, the search for “carry-trades” and the perception of continuous
growth explain these levels. A deviation of the spreads could occur in the event of default or if
economic growth becomes more vigorous.
We expect little total return from bond portfolios in early 2020.

5. Politics

The political agenda will become more precise in the USA with, in the background, an
impeachment procedure. Europe will learn to live without Great Britain, Asia will see elections
in Taiwan, as well as in Hong Kong in a tense climate.
The number of geopolitical tensions around the world will not decrease in 2020 and, for the
moment, they are the same actors.
The US election will be the biggest source of uncertainty.

6. Commodities

Oil prices will fluctuate based on perceptions of economic growth, trade/tariff wars and
geopolitical events around the Persian Gulf.
Gold has been in demand since late spring 2019; investors see this as a store of real value and
a weak correlation with bonds and stocks.

7. Equities

Developed markets continue to be supported by low or negative interest rates, propelling the
investor toward dividends or growth.
A certain easing of Sino-American trade tensions should benefit the whole and Germany in
particular.
Our preference is for sectors driven by growth and against the detriment of cyclicals.

8. Fixed Income

Keystone of the market, interest rates have taken bonds and stocks to new heights.
Given the low nominal level in the USA, there is little to expect in terms of rate cuts. In Europe
negative rates show their limit as regards to economic recovery; more and more voices are
being heard calling for tax cuts rather than negative rates.
Default rates could rise and therefore create stress on High-Yield bonds. No “buy & hold”
strategy under these circumstances.

High Yield in emerging markets, in hard currencies, is part of the best options.

9. Currencies

We do not anticipate large movements for the main currencies.
Emerging Markets’ currencies are so many micro-realities that it is not justified to
advise in a global manner.

10. Others

In this uncertain and volatile environment, it seems appropriate to favor Hedge Funds
for their low correlation with the equity markets as well as real estate as a source of
income and store of value.

11. Focus Points.

12. Asset Allocation.

We maintain our grids.

12 décembre 2019
W.I.S.E. Management SA

Tactical Asset Allocation Committee

End of décembre 2019

allocation revue