The global economic slowdown and the lack of an agreement in the US-China trade talks last month resulted in a sharp decrease in developed market government bond yields. We believe the bond market is overly pessimistic and government bonds are significantly overvalued. As a result, bond yields may rise going forward. This dynamic will be reinforced by the transition from monetary policy to fiscal stimulus funded via increased bond issuance.The global economic slowdown and the lack of an agreement in the US-China trade talks last month resulted in a sharp decrease in developed market government bond yields. We believe the bond market is overly pessimistic and government bonds are significantly overvalued. As a result, bond yields may rise going forward. This dynamic will be reinforced by the transition from monetary policy to fiscal stimulus funded via increased bond issuance.

Bond market volatility is also likely to rise going forward and will be exacerbated by record-low dealer inventory. This is consistent with a steepening of the yield curve. Within our core fixed income exposure, we prefer a broadly neutral allocation to government bonds with a preference for short-dated maturities over the long-end. Within credit, we prefer the highest quality of the high yield sector known as the Fallen Angels. 

We are currently invested in emerging market debt and inflation-linked securities. Within emerging markets, we favour a targeted approach investing in Chinese local currency bonds over a diversified index. The rationale for this position is underpinned by the fact that Chinese securities will gradually become a larger allocation within blue-chip global bond indices and the People’s Bank of China is easing monetary policy. Our bullish view on China also makes part of the case for inflation-linked securities. Inflation is increasingly driven by global factors, and in particular, inflation/disinflation emanating from China. Chinese factory gate price inflation has historically been a strong leading indicator for global inflation. The increase in this index points towards a pick-up in inflation from current levels.

Our core equity allocation is invested in smart beta trading strategies comprised of global single factor and regional multi-factor ETFs. Smart beta has a proven track-record relative to traditional market capitalisation weighted indices. In Q3, the regional multi-factor ETFs performed particularly well, outperforming the MSCI World by approximately 2.5%.

Three months ago, we highlighted how supply chains had started to shift from China to other emerging markets and as a result entered a new position in Mexican equities. This was the best performing EM satellite last quarter, outperforming the benchmark by approximately 2.50%. Three months ago, we highlighted how supply chains had started to shift from China to other emerging markets and as a result entered a new position in Mexican equities. This was the best performing EM satellite last quarter, outperforming the benchmark by approximately 2.50%. 

Russia was our second-best performing EM satellite in Q3, and we continue to like the trade given attractive valuations and high dividend yields. We also like Chinese equities and believe there is significant upside potential following the successful trade negotiations with the US. Moreover, the government’s continued efforts to open-up their financial markets bodes well for our China position.

‘Doughnut’ economics proposes a radical alternative to the traditional model of development, which focused for decades on economic growth as the sole means to improve the wellbeing of societies.

The Doughnut is an attempt to bring together social and environmental concerns, recognizing that economic growth is important but that it often neglects other fundamental elements of development, namely those relating to the environment and human rights. The Doughnut is an apt analogy for sustainable investing, which is designed to widen the focus of investors to include Environmental, Social and Governance (ESG) considerations on top of a traditional emphasis on financial return.

There is already significant demand for ESG investments, and AUM with an ESG mandate is expected to balloon to $40tn by the end of next year. What’s more, a UK government survey found recently that 68% of UK savers want for their investments to consider impact on people and planet alongside financial performance. Interest is even higher for high net worth individuals, millennials and women. ESG represents a ‘New Normal’ for investment professionals, an environment in which the conversation has shifted from ‘why’ to ‘how’ to get on board.

It has been a very good year for investors with exposure to both bonds and equities. Positive performance has been driven by the return of the Goldilocks scenario in which interest rates and inflation remain low, thereby enhancing equity market valuations. There is no doubt that the global economy has slowed, but it still remains very far away from recession territory, with Europe being the only exception. Central Banks around the world have adopted precautionary, dovish monetary policies to safeguard against any further slowdown. This will extend the life of the record setting bull market in equities and delay the bursting of the bond bubble for several more quarters. Emerging markets are particularly attractive given the progress that has been made on a range of global trade agreements and our bearish view on the US dollar. The risk environment remains favourable and the portfolios are fully invested with a highly diversified mix of asset classes and regional exposures.

The global economic slowdown and the lack of an agreement in the US-China trade talks last month resulted in a sharp decrease in developed market government bond yields. We believe the bond market is overly pessimistic and government bonds are significantly overvalued. As a result, bond yields may rise going forward. This dynamic will be reinforced by the transition from monetary policy to fiscal stimulus funded via increased bond issuance.

Bond market volatility is also likely to rise going forward and will be exacerbated by record-low dealer inventory. This is consistent with a steepening of the yield curve. Within our core fixed income exposure, we prefer a broadly neutral allocation to government bonds with a preference for short-dated maturities over the long-end. Within credit, we prefer the highest quality of the high yield sector known as the Fallen Angels.

We are currently invested in emerging market debt and inflation-linked securities. Within emerging markets, we favour a targeted approach investing in Chinese local currency bonds over a diversified index. The rationale for this position is underpinned by the fact that Chinese securities will gradually become a larger allocation within blue-chip global bond indices and the People’s Bank of China is easing monetary policy. Our bullish view on China also makes part of the case for inflation-linked securities. Inflation is increasingly driven by global factors, and in particular, inflation/disinflation emanating from China. Chinese factory gate price inflation has historically been a strong leading indicator for global inflation. The increase in this index points towards a pick-up in inflation from current levels.

Our core equity allocation is invested in smart beta trading strategies comprised of global single factor and regional multi-factor ETFs. Smart beta has a proven track-record relative to traditional market capitalisation weighted indices. In Q3, the regional multi-factor ETFs performed particularly well, outperforming the MSCI World by approximately 2.5%.

Three months ago, we highlighted how supply chains had started to shift from China to other emerging markets and as a result entered a new position in Mexican equities. This was the best performing EM satellite last quarter, outperforming the benchmark by approximately 2.50%.

Russia was our second-best performing EM satellite in Q3, and we continue to like the trade given attractive valuations and high dividend yields. We also like Chinese equities and believe there is significant upside potential following the successful trade negotiations with the US. Moreover, the government’s continued efforts to open-up their financial markets bodes well for our China position.

It has been a very good year for investors with exposure to both bonds and equities. Positive performance has been driven by the return of the Goldilocks scenario in which interest rates and inflation remain low, thereby enhancing equity market valuations. There is no doubt that the global economy has slowed, but it still remains very far away from recession territory, with Europe being the only exception. Central Banks around the world have adopted precautionary, dovish monetary policies to safeguard against any further slowdown. This will extend the life of the record setting bull market in equities and delay the bursting of the bond bubble for several more quarters. Emerging markets are particularly attractive given the progress that has been made on a range of global trade agreements and our bearish view on the US dollar. The risk environment remains favourable and the portfolios are fully invested with a highly diversified mix of asset classes and regional exposures.