Asset Allocation September 2017

20 Sep 2017

  • Risk assets: under the weather
  • Upbeat global growth
  • Asset allocation: back to underweight duration, still bearish on euro versus US dollar


August was generally positive in terms of macroeconomic data, but there was more of a stir from (geo)political issues. US President Trump’s jawboning against a threatening North Korea tempered risk assets during most of the month. Global equities retreated as volatility spiked. However, a late rebound meant they ended the month flattish overall. The US S&P 500 index was unchanged over the month, with information technology and utilities making up for the weakness in the energy, telecommunication services and financial sectors. European equities finished slightly down, with bond proxies such as real estate and utilities outperforming. Emerging markets rallied to finish the month up slightly, largely driven by IT stocks.

Haven assets benefited from the risk-averse backdrop. Gold rose by more than 4% over the month and silver by almost 6%. Bond markets did well, driven by risk-off investor sentiment and the absence of hawkish comments by leading central banks.

The debt ceiling debate made a comeback in US politics as the limit on the US government’s borrowing capacity will soon need an extension. It seems like another distraction from President Trump’s reform agenda, driving the so-called Trump trades further into the past. Protectionism and reflation, which were the main two drivers of these trades, are now pretty much ignored by market participants. Inflation expectations have now totally retraced their post-election gains. Granted, President Trump has had difficulties implementing his agenda, especially in areas where he needs Congressional approval, such as tax reform. That said, we still think that reform talk will be followed by action, especially as the mid-term elections approach.


Among the best performers in August, industrial metals such as copper, iron ore and zinc benefited from a solid macroeconomic environment. In particular, the Chinese PMI surprised to the upside at 51.7, up from 51.4 in July. That said, non-manufacturing PMI was weaker at 53.4.
At this point, industrial metals prices are starting to look overblown. Another reason for the rally in industrial metals is speculation. Even though the Chinese authorities have not yet tackled the overproduction issue by implementing supply-side reforms, investors appear to have anticipated such curbs, which may come after the October’s Communist Party Congress. Overcapacity and the reduction of the economic stimulus could then start to be addressed more firmly.

Download to read more