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Weekly Manager Views

29 November 2019

At GAM Investments’ Weekly Investment Meeting held on 27 November, the speakers were Michael Biggs, who discussed the global macro backdrop, and Davide Marchesin, who examined the current environment for global long / short equity.

Global macro

Michael Biggs

  • The Federal Reserve (Fed) has lowered its expectations for longer-term policy rates, despite keeping its growth and inflation expectations more or less unchanged. In our view, this implies a downward revision to perceived natural rates. We feel that the long-term policy rate has undergone a profound change, moving from 3.0 to 2.5%. This would suggest we can obtain the same growth and inflation we experienced in the past, but with interest rates 50 bps lower. Consequently, we would anticipate yields on all asset classes to then fall by 50 bps. Credit has rallied, meanwhile, but investment grade has outperformed high yield.

  • Based on the recently released senior loan officer survey, we feel US growth could slow down to 2% but it is not likely to enter a recession. Banks’ willingness to lend has reduced, and we could see residential investment pick up to 10%. Overall, we feel that there is a move towards a neutral rate, and the credit impulse for the US will likely remain around zero.

  • Next week’s PMI data could provide some useful pointers for the global growth cycle. Global manufacturing PMI bottomed in July, but has made very tentative gains since then, while DRAM prices, another key indicator, continue to fall. We would hope for a PMI rally reaching the 50 level in December, which would point towards 3% global growth. If we do not see stronger numbers, then we would need to remain cautious about our growth view.

  • The risks to global growth primarily stem from trade tariffs placed on China in September and the ensuing negative impact this has had on trade between the US and Asia. If China were to pick up, we could see stronger growth, which would possibly benefit high yield bonds and equities.

Global long / short equity

Davide Marchesin

  • Our approach has a focus on capturing sustainable sources of alpha globally by identifying companies with positive or negative earnings surprises. Importantly, we take a flexible approach towards country allocation and look at a wide range of opportunities across developed and emerging markets.

  • On the whole, equity earnings revisions have been negative throughout most sectors and regions. Major negative earnings revisions have occurred among energy, materials and consumer discretionary names. The industrials sector in particular has witnessed negative earnings revisions yet companies continue to trade at steep valuations. Even so, interesting opportunities remain among stocks exposed to aerospace and defence themes. There have been a couple of sector exceptions – healthcare and real estate – where earnings revisions have been neutral.

  • In the US value has outperformed growth during the last six months and we believe it is important not to downplay this trend. Such a factor rotation could be an interesting and powerful theme going forward. Banks and consumer staples are two major sectors contributing to the value comeback; in particular we see attractive opportunities among US banks and food stocks. In the technology space, structural growth themes remain at play. We are positive on software companies, but less so on hardware stocks.

  • Overall, we are taking a cautious stance heading into 2020. Equity markets continue to witness negative earnings revisions across sectors, valuations are stretched, interest rates are low and inflation expectations are depressed.

Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or advice. Reference to a security is not a recommendation to buy or sell that security.
November 2019