Extraordinary meeting of the Union Investment Committee
Risk positioning reined in to moderately defensive
Moderately defensive risk positioning, RoRo meter now at 2
The Union Investment Committee (UIC) convened for an extraordinary meeting on 3 June. It pared back the risk positioning, taking the RoRo meter to level 2, and adopted a more defensive stance in the UIC portfolio in view of the escalating trade dispute and leading indicators that are already weakening again.
In the equities asset class, the committee reduced the weighting of shares from industrialised countries by 2.5 percentage points. This means that equities overall are now underweighted by 5 percentage points. The UIC neutralised the overweighting of energy exposures and thus of commodities overall (decrease of 1 percentage point). In the fixed income asset class, the overweighting of government bonds from emerging markets was scaled back (decrease of 2.5 percentage points) and the slight underweighting of covered bonds was removed (increase of 1 percentage point). As regards currencies, the committee reduced the short position in emerging markets currencies by 1 percentage point, eliminating the long position in euros at the same time. The resulting liquidity is being held in cash (increase of 5 percentage points).
Uncertainty points in favour of a more defensive positioning
The UIC’s decision is due to the re-emergence of heightened uncertainty in global trade relations. Negative headlines have emerged in several places, and it is looking increasingly improbable that an agreement will be reached before the G20 summit at the end of June. The blacklisting of Huawei means that supply chains in key sectors of the economy are significantly affected for the first time. In response, China announced last week that it would restrict exports of rare earth minerals to the US. These commodities are notably used in the production of high-tech products. Such non-tariff-based trade barriers will force many companies to change their supply chains. This made no impression on Donald Trump, who imposed tariffs on all US imports from Mexico at the end of last week. His aim in doing so is to force Mexico to adopt a more restrictive migration policy. This has opened up a second front in US trade relations in addition to the worsening dispute with China. The previous risk scenario – that trade relations would not ease – is thus becoming the baseline scenario. This comes just as the economy is beginning to falter again. Many leading indicators (such as purchasing managers’ indices) have deteriorated markedly in recent weeks.
In the capital markets, sentiment towards equities has also turned gloomier again, and the exposure has been scaled back slightly. However, many systematic investors have only just begun to reduce risk and will continue to do so if prices fall further.
The increase in uncertainty is making the UIC a lot more cautious. It does not believe that the hardening of positions in the trade dispute can be resolved in the next few weeks. Concerns about the economy have led to a sharp fall in the price of crude oil. In Europe, the situation in Italy and the United Kingdom has become uncertain, and the future of Germany’s grand coalition is unclear. The markets are hoping for support from the central banks. The probability of the Fed lowering the interest rate in September – something that the markets have already priced in – has risen to over 80 per cent in the last few days. Against this backdrop, the UIC is erring on the side of caution. Except for a small carry position in investment-grade corporate bonds, all high-risk asset classes in the UIC portfolio are now underweight or neutral. Safe havens are likely to remain in demand.
Our portfolio holdings
Unless otherwise noted, all Information and illustrations are as at 3 June 2019.
Please note that the changes from the extraordinary UIC meeting on 3 June 2019 are not included in the video.