Q3 2019 Newsletter

At a Glance

• Equity markets were mostly flat during Q3 across the board.• The dovish tone from Central Bankers, global slowdown, political sagas , commercial tensions and prudent

expectations from companies for the remaining of 2019. increase uncertainties for Q4 2019.• MSCI World finished the quarter flat (+15.3% ytd) as US equities were quasi flat (+1.1% QoQ)• Eurozone equities (+2.6%% QoQ) supported by central banks stepping away from tighter monetary policy and

rallying long bonds.• Emerging markets (EM) ended the quarter down 5% led by China (Hang Seng down +8% and MSCI China

down 5%). Political tensions, HK protests, and weak manufacturing weighted on the index performance.• UK Market ended flattish despite the psychodrama surrounding Brexit.• SMI was up +1.8% for Q3.• Markets saw some volatility due to trade tensions between China and US.• Tensions in Middle East with drone attacks on Saudi oil fields added nervousness to the market.• Bond markets were also firm in all regions, due to accommodative stance from Central Banks overall and

fears of slowdown due to commercial and political tensions.• US 10 years yield have fallen at 1.66% versus 2% at the end of June.• We observed the same trend on the German Bund 10 years yield at 0.55% versus 0.44% in summer.• Once again after March 2018 we observed an inverted US yield curve.• Usually this atypical picture means a slowdown into the economy on a foreseeable future (as observed in

manufacturing sectors).

The Power of Words

• We believe this inversion is due to the persistent trade tensions between US and other partners which could impact the long end of the yield curve.

• We also think that the Fed balance sheet should impact at a certain point the yield curve due to their bond portfolio duration.

• On emerging market debt, inflows support both local and hard currency markets. Valuations and yields are still proving attractive.

• Energy price, despite the oil fields attacks in Saudi Arabia suffered a 10% loss due to slow demand and over supply (ignoring the OPEC cuts effect on price).

• Precious metals recorded a 10% gain, supported by the safe heaven asset seekers.• On the Forex side, accommodative dovish shifts and lower yields gave some stability to Euro and USD.• Emerging currencies were positive YTD overall due to inflows and lower US rates (+1% on the JP Morgan

currency index).• The Yuan slid 5% following trade tensions and slowdown on manufacturing sectors.

Q3 2019 Newsletter

Source TheStreet.com

Macro economy

Q2-2019 PMI Indices Point to a Slowdown in Global Supply. Chain Demand and Supply Activity Levels, mainly in industry

Q3 2019 Newsletter

Source; Bloomberg

• US 2019 GDP growth expected to slowdown at 2% (in line with expectations) versus 3% in 2018.• PMI Manufacturing slowed to 47.8 versus 59.3 December 2018 indicating economic contraction (a reading of

50 and above indicates expansion).• Non Manufacturing PMI is still resilient above 56 (versus 60.7 December 2018).• Recent job reports have been volatile but on average except in February 2019 job creation is still solid.• Consumption slowed also but should remain solid until end of 2019.

Source; pbr market tools

Macro Economy

• Growth in Eurozone still weak at 1.2% YoY with Italy and Germany closed to recession. Risks to further slowdown linger political uncertainty and sluggish global demand mainly in manufacturing.

• Focus Economics analysts reduced growth forecast to1.1% in 2019, which is down 0.1 percentage points from last month’s forecast, and 1.4% in 2020 (should be reduced during Q3 to 1.1% we expect).

• Weakness in manufacturing activities in Germany with an auto industry still impacted overall growth.• PMI Manufacturing slowed to 47 in June versus 51.8 in December 2018.• PMI Service showed resilience at above 52 (51.2 in December).• China growth, following slowdown and trade tensions, expected to stand just above 6%.

Q3 2019 Newsletter

Source; JSS

Q3 2019 Newsletter

• HK protest should weigh on some Chinese economics indicators.• Chinese PMI manufacturing still below 50 (versus 50.2 in December 2018).• Chinese PMI Services slowed to 53.70 versus 53.80 on last December.• Retails sales still demonstrate above 8.2% growth despite their deceleration in the last few months.

Corporate earnings

• Earnings growth: For Q3 2019, the estimated earnings decline for the S&P 500 is -3.7%.• If -3.7% is the actual decline for the quarter, it will mark the first time the index has reported three straight

quarters of year-over-year earnings declines from Q4 2015 through Q2 2016. .• Earnings Revisions: On June 30, the estimated earnings decline for Q3 2019 was -0.6%.• All eleven sectors have lower growth rates today (compared to June 30 2019) due to downward revisions to

EPS estimates.• Earnings Guidance: For Q3 2019, 82 S&P 500 companies have issued negative EPS guidance and 31 S&P

500 companies have issued positive ones.• The forward 12-month P/E ratio for the S&P 500 is 16.8. This P/E ratio is above the 5-year average (16.6) and

above the 10-year average (14.8).• In Europe, Third quarter earnings are expected to decrease 2.2% when compared yoy.

Source; Economy Watch

Recommendation and Strategy

Q3 2019 Newsletter

Equity Markets

Bond and equity markets are arguing with each other. Bond markets see weak global data (mainly on manufacturing) and declining inflation expectations. Equity markets see Fed easing, and new QE from Central Bankers.

In the last quarter we saw some consolidation of the equity market. We think Q4 will start by a volatile period that will create a downside pressure linked to global slowdown and mitigate expectations for the end of 2019 and the first half of 2020.Trump hard rhetoric showed its limit in term of macro economy, and we think he will strengthen his rhetoric, adding some pressure on equities.Earnings season will increase fears of a further slowdown , especially with the outlook of some manufacturers. of the industrial sector.Persistent uncertainty from protectionist policies is denting corporate confidence and slowing business spending

Q3 2019 Newsletter

For the last Quarter of 2019, we believe that the downward pressure through the previous earnings season with weaker outlooks in manufacturing, mainly automakers and the financial industry from the services sector. Global economic growth slows however we don’t expect a recession for the next 12 months. The forward 12-month P/E ratio is 16.8, which is above the 5-year average and above the 10-year average. As for Q4, analysts see a growth of 2.6% (due also to a reduction in their earnings expectations) in earnings for the fourth quarter after a slight decline on Q3.

We have a consensus of 8% growth in earnings-per-share for the Eurozone equity markets in 2019, which would be a positive outcome for investors relatively to what they have experienced over the past two decades with an acceleration in Q4 2019.

For Emerging Markets, we saw some uncertainties growing in APAC following trade tensions.

We believe that investors underestimate the political situation in HK and the determination from protesters and China, which could show weakness for both international and political internal reasons.

For those reasons we reduce our exposure on equities to underweight for start of Q4 2019.

Outflows from equities is still important

Source; freemalaysiatoday

Q3 2019 Newsletter

US Market

Emerging

Eurozone Switzerland

Underweight (from Neutral)

Neutral (from Positive with focus on mainland China, Southeast Asia Vietnam, Philippines)NeutralUnderweight (neutral on Q2)

Recommended sectors

• We maintain a global exposure on the following sectors:• Education• Healthcare dedicated to life enhancement for aging populations (see our aging certificate, +7.75% ytd)• Infrastructure with focus on Water and Transportation (US rail activities and general emerging

infrastructures)• Digital payments, and Robotics on weakness• Initiate an overweight on value stock and value companies approach.

Fixed Income

The normalisation of monetary policy sets the direction for global bond marketsAs expected the Fed cooled its path on monetary policy in 2019, and cuts rates during summer.As Powell said there is no roadbook for trade wars and yields should stay low into the next 2 quarters.We think the slowdown in manufacturing will put some pressure on the Fed to cut once again the rates between October and November 2019 and following the slowdown in GDP Growth.Those cuts in our opinion are largely anticipated by the long yield curve.Bond prices and yields could become increasingly sensitive to the US Budget outlook over the coming 12 months,The US Yield Curve should stay relatively flat into the next 12 months and the FED should stay accommodative.

Q3 2019 Newsletter

Following slowdown in Europe, the ECB also changed its scope on rates, and cut rates by 0.1 to 0.5 and added EUR 20 billion in fresh stimulus.We think Christine Lagarde will continue Draghi’s growth driven approach throughout her mandate. The ECB needs to restart lending and create conditions that would stimulate growth. We think stimulus will be not enough on its own and the ECB will have to be more creative in order to avoid recession in the EU zone.The Banking sector suffered much more in Europe than in US with negative rates and it is a persistent problem for Europe. We think the ECB maybe tempted to apply the same approach as the SNB (Swiss National Bank) and stop applying negative rates on portions of the EU bank capitals.Merkel’s political weakness is also a bog question mark for Europe for the next 6 months.In Japan, BoJ will continue to purchase JGBs at a pace of about 80trn (US$ 712bn) per year in a flexible manner. Regarding asset purchases other than JGB, the board unanimously decided to purchase ETFs and Japanese REITS at an annual pace of about JPY 6trn (US$ 55bn) and JPY 90bn (US$790mio) respectively.Similarly, the BoJ’s purchases of commercial papers and corporate bonds were kept unchanged at about JPY 2.2trn and JPY 3.2trn per year. The low level of inflation is still a concern in Japan (1.1% well below the official target of 2%) with weakness in investment also a large concern.In Emerging bonds markets, with a weaker US$, and less aggressive monetary policy from the FED, Emerging markets debt still look attractive in hard currency for the next 6 months.

Q3 2019 Newsletter

Euro Sovereign

Debt US Sovereign

Debt High Yield

Euro High Yield US

Emerging Corps

Convertible Bonds

Hybrids and Perps

Floaters Euro

Floaters US$

Negative, avoid long duration

Negative, avoid any long duration

Neutral (positive,) remain on short-term duration

Underweight (neutral) possible widening of spreads Positive

on hard currencies exposures

Positive on low delta assets

Positive, we favour assets with foreseeable future call

options Positive

Turn positive

source : Blackrock

Q3 2019 Newsletter

CurrenciesWe remain negative on USD even if we don’t see a sharp decline simply due to the previous and expected US FED rate cuts. More pressure from macro -indicators should put some pressure on the currency.

We are positive on Yuan above 7CNY vs USD due to the implementation of structural reform and fiscal stimulus.

We don’t think that HK protest is a key issue on the level of Yuan as it is also a political instrument for Chinese authorities on foreign issue.

Euro should stay stable versus USD with an expected minor positive impact from the normalization of its monetary policy (after the European elections).

Following our assumption on Brexit, we suggest to be invested in GBP through Accumulators, DOCU type instruments, or capital guranteed products

We forecast a weaker CHF during the end of 2019, as we think European budget tensions should ease and structural reforms should be implemented post European elections.

We keep our positive opinion on £.

Target 2019: EUR/USD: 1.16

USD/CHF: 1.07

USD/CNH: 6.40

GBP/USD: 1.3120

GBP/EUR: 1.17

EUR/CHF: 1.1650

Metals

During the last four quarters, central banks' gold buying reached a record high of 715.7 tonnes. In Q1 of 2019,

global gold demand stood at 1,053.3 tonnes, up 7 percent year on year according to the report.

China added 100 tons to its reserve YTD.

Following trade tensions, and political uncertainties, Gold was up 4.5% during Q3

Silver made a huge performance during Q3, up 10.77%.

We still favour Silver for Q4 which should outperform Gold, see our spread related product

We also recommend to be invested into Gold mines through ETF and/ or Funds (ShareGold).

Target 2019: Gold 1’560$/oz (as of 21.10.2019) Silver 18.50$/oz

Q3 2019 Newsletter

CommoditiesOPEC will extend production cuts into 2020, attempting to buoy oil prices as the world’s leading exporters fret about the outlook for global demand growth and the relentless rise in output from America’s shale fields

Energy Agency (IEA) and OPEC have cut their estimates for 2019 world oil demand growth in their latest monthly reports.

The Energy Information Agency (EIA) estimates that U.S. crude oil production will average 12.3 million b/d in 2019 (up 2% versus March) versus 10.9 b/d in 2018.

EIA forecasts Brent and West Texas Intermediate crude oil spot prices will average $ 54.50 ($ 66 on last report) per barrel (b) and $59.29/ (54 before) respectively, in 2019 to reflect the huge rebound on Q1 and Q2.

Global oil supply will outpace demand throughout 2019, as a relentless rise in output swamps growth in consumption that is at risk from a slowing economy, the International Energy Agency said on Wednesday

Source World Council

We keep our neutral rating on Oil. All producers have different timing and interest, the reason for it being difficult to find a real consensus at the current price.Only a price below 45 USD per barrel could inverse this divergence and lead to a consensus meanwhile geopolitical tensions could heavily impact the price.

Q3 2019 Newsletter

Importantstrategies

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