BNP Paribas AM: Cautiously constructive on trade war risks

The latest issue of the Asset Allocation Monthly from BNP Paribas Asset Management’s Multi Asset, Quantitative & Solutions (‘MAQS’) investment group: June 2019 - Cautiously constructive on trade war risks

03.06.2019 | 15:04 Uhr

SUMMARY

Trade war risks are back in focus

  • Investors are grappling with another wave of Sino-US trade war angst
  • Markets have suffered from renewed volatility

De-globalisation is at the heart of the trade war

  • We have long argued that there is more than trade to Sino-US tensions and de-globalisation is a medium to long-term theme
  • We are not surprised to see a flare-up in tensions

‘Fragile goldilocks’: Is a slowdown becoming a bigger risk?

  • While it is certainly a risk worth monitoring, our slowdown scenario probabilities already incorporate Sino-US tensions
  • Given the goldilocks economic backdrop, recent tensions have provided us with attractive entry points to add market risk in developed market equities

Fundamentals make the difference

  • Not all assets/economies are equal and fundamentals are making the difference
  • EM/Chinese assets are underperforming as trade war risks pose a bigger challenge to economic prospects
  • Developed market fundamentals (specifically domestic US) have remained solid

 

ASSET ALLOCATION

Buy the dip: long DM equities

  • We used the recent correction to add market risk via US and EMU equities

Long carry assets

  • We still see the goldilocks backdrop as conducive to carry assets and are long EM hard currency debt (high-carry, USD exposure)
  • REITS are also on our radar to buy on dips

Building robust portfolios

  • While we are cautiously constructive on the resolution of the US-China trade tensions, we also hold diversifying trades to protect portfolios
  • Longs in 5-year US Treasuries vs 5-year German Bunds, USD vs Asia FX and RV CAC/DAX within European equities should help to diversify trade war risks
The full report is available here.

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