Q3 2019 Outlook & Review

Economic Outlook

Global growth conditions are currently among the weakest since the financial crisis, and growth risks have increased from further escalation of geopolitical tensions.
Tariffs have not yet taken a big bite out of economic activity, but if trade hostilities intensify, the effects of higher tariffs and supply chain disruptions could snowball and push the global economy into a full-fledged recession.
Gross Domestic Product (GDP) growth surprised on the upside in Q1 in the U.S., Eurozone, UK, Japan and China. However, Q2 growth in the major economies is now expected to be soft as a payback for the solid Q1 growth.
Strains in trade relations and slowing global growth have increased uncertainty around the emerging markets growth outlook.
With muted inflation, global central banks are embarking on a fresh round of reflation by cutting rates to cushion the growth slowdown. In fact, many of them have indicated a willingness to cut rates even further, if needed.
The jury is still out as to whether central banks are ahead of the curve and will succeed in engineering the elusive soft landing or whether the current dovish shift will be viewed as too little too late in retrospect.
In the U.S., the yield curve has inverted—an ominous sign of a looming recession. However, other reliable indicators, such as high yield credit spreads, initial unemployment claims, and the Conference Board Leading Economic Index® (LEI) do not paint the same alarming picture.

Investment Outlook

Our view is that U.S.-China interests have permanently diverged and should be viewed in the context of a geopolitical competition that is unlikely to be resolved by a trade deal. Thus, the current tensions are likely to persist for some time.
However, tensions are likely to ebb and flow, and a positive scenario for risky assets could involve a trade truce ahead of the presidential election year, along with continued central bank dovishness and more China stimulus.
The strong bounce-back for risk assets, along with the reescalation of the U.S.-China trade tensions, convinced us to initiate de-risking trades in early May, including shifting back to neutral in global stocks, holding additional cash, and buying some Treasuries.
We pulled back our emerging markets exposure toward neutral early in the second quarter (please see Hitting the Pause Button on Emerging Markets Equities) bringing exposure back to U.S. stocks. We currently maintain balanced exposure among U.S., international developed market and emerging market stocks.
We also trimmed our exposure to fixed income risk assets in our multi-asset portfolios. We are overweight U.S. cash given the positive real yield and the lack of yield pickup available further out the maturity curve. Within fixed income, we have shifted exposure away from U.S. high yield bonds and emerging market debt (hard currency) to core bonds.
We are underweight commodity futures as global growth conditions remain soft, inflation pressures stay muted, and the U.S. dollar’s strong run continues.

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Disclosures

PGIM Quantitative Solutions seeks to help solve complex investment problems with custom systematic solutions across the risk/return spectrum.

Q3 2019 Outlook & Review

Economic Outlook

Global growth conditions are currently among the weakest since the financial crisis, and growth risks have increased from further escalation of geopolitical tensions.

Tariffs have not yet taken a big bite out of economic activity, but if trade hostilities intensify, the effects of higher tariffs and supply chain disruptions could snowball and push the global economy into a full-fledged recession.

Gross Domestic Product (GDP) growth surprised on the upside in Q1 in the U.S., Eurozone, UK, Japan and China. However, Q2 growth in the major economies is now expected to be soft as a payback for the solid Q1 growth.

Strains in trade relations and slowing global growth have increased uncertainty around the emerging markets growth outlook.

With muted inflation, global central banks are embarking on a fresh round of reflation by cutting rates to cushion the growth slowdown. In fact, many of them have indicated a willingness to cut rates even further, if needed.

The jury is still out as to whether central banks are ahead of the curve and will succeed in engineering the elusive soft landing or whether the current dovish shift will be viewed as too little too late in retrospect.

In the U.S., the yield curve has inverted—an ominous sign of a looming recession. However, other reliable indicators, such as high yield credit spreads, initial unemployment claims, and the Conference Board Leading Economic Index® (LEI) do not paint the same alarming picture.

Investment Outlook

Our view is that U.S.-China interests have permanently diverged and should be viewed in the context of a geopolitical competition that is unlikely to be resolved by a trade deal. Thus, the current tensions are likely to persist for some time.

However, tensions are likely to ebb and flow, and a positive scenario for risky assets could involve a trade truce ahead of the presidential election year, along with continued central bank dovishness and more China stimulus.

The strong bounce-back for risk assets, along with the reescalation of the U.S.-China trade tensions, convinced us to initiate de-risking trades in early May, including shifting back to neutral in global stocks, holding additional cash, and buying some Treasuries.

We are underweight commodity futures as global growth conditions remain soft, inflation pressures stay muted, and the U.S. dollar’s strong run continues.