LGT Capital Partners concluded its quarterly tactical asset allocation (TAA) review for the second quarter of 2019 last week. The following developments of the past three months set the backdrop of our deliberations:
- The US Federal Reserve (Fed) and subsequently some of other major central banks have pivoted to a more dovish monetary policy outlook, triggering a swift rebound in risk asset markets
- However, this shift has also led to a rapid decline in term premia (i.e. the difference between long- and short-term interest rates), which is widely regarded as an early recession warning
- Reports that the Sino-American trade talks were making at least partial progress and signs that recent Chinese stimulus measures would help to stabilize growth also contributed to the improved investors’ sentiment
- The actual macro data point to a continued deceleration of global growth, although the US economy has held up remarkably well, while Europe has seen the most precipitous cooling and most other regions limped along somewhere in between.
Against this backdrop, our macro assessment for the coming quarter was set as follows:
- In our baseline scenario, the world economy continues to grow – however, growth momentum is decreasing further
- In our less likely risk scenario, the deceleration could take a more pronounced form as various structural factors (global trade conflicts, noisy European politics, etc.) exacerbate recession fears
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Note: The next edition of the LGT Beacon is scheduled for May 2019.