As the overall investment environment remains uncertain and the attractiveness of major asset classes is challenged, we believe it is appropriate to focus on currencies as a potential source of return and risk diversification for a portfolio. Indeed, FX has
Uncertainty over growth, inflation and corporate earnings persists, even though there has been a mild improvement on the economic front. These trends underscore the need to be active and well diversified. In equities, investors should stay cautious and consider playing
Biodiversity, human activity and corporates Biodiversity is part of the Earth’s natural capital and considered the cornerstone of a well-functioning planet. The many benefits to humans provided by natural capital are often integral to the provision of clean drinking water,
Focus to shift from inflation to growth risk This year, we expect the global economic environment to feature sluggish growth and an extended period of sustained high inflation. For the credit market, it will be a tale of two halves:
2022 ended in an abrupt fast-track reopening. In one month, China dropped most of its Covid-related restrictions, vowed to support the housing market more, and set pro-growth policies. We expect the Chinese economy to be separated from the global slowdown
The energy crisis resulting from the war in Ukraine has altered profoundly Europe’s economic performance and prospects. Countries have been affected unevenly, based on how dependent they are on Russian gas and oil. German industry has been particularly hard hit.
Central & alternative scenarios (12 to 18 months horizon) Monthly update We maintain the probabilities of our scenarios unchanged. Some of the risk factors we identify may occur in our central scenario, which is probably not yet fully priced-in by
Profit recession, tightening central banks (with divergences in forward guidance), and stillhigh inflation are primary market concerns. US inflation moderating has been a positive lately, but whether that deceleration will be sustained would decide the Fed’s stance, which in turn
A combination of sustained inflation and mounting recession fears, interlinked with the geopolitical situation, are the main drivers affecting the current and forward-looking macro environments. The bulk of the uncertainty is in the short to medium term. There is a
Because of the 2015 Paris Agreement, the development of ESG investing and the emergence of net zero emission policies, climate risk is certainly the most important topic and challenge for asset owners and managers now and will remain so over
Global markets ended November on a positive note after months of generally poor returns. Equities were bolstered on hopes that central banks are heading closer to their terminal rates amid looming recession risks. In Euro terms, European equities recorded staggering
In this paper, we investigate the relationship between biodiversity and companies, through the lens of corporate bonds. We focus on acute biodiversity events and address biodiversity as a risk, considering its looming losses. We illustrate the material and tangible operational
The emergence of net zero emissions policies is currently one of the most important topics among asset owners and managers. It considerably changes portfolio allocation and the investment framework of both passive and active investors. The academic literature generally concludes
The FX regime of the last 20-25 years was characterised by a massive accumulation of USD reserves by export-oriented Asian countries, overall low FX volatility, and a still dominant role for the USD as a ‘public good’ facilitating global trade.
We expect global growth to slow significantly, with several countries across both developed markets (DM) and EM suffering stagnation, while others may face a slowdown at best. Global growth should land at around 2.2% in 2023, down from 3.4% in
Developments in Artificial Intelligence (AI) and machine learning have led to the creation of a new type of ESG data that do not necessarily rely on information provided by companies. This paper reviews the use of AI in the ESG
The good news is that AI tools are available now which can collect and analyse more information on ESG risks and opportunities than ever before. These tools improve the quality of data, analyse it effectively and create new exciting opportunities.
We maintain the content and probabilities of our scenarios. Note that some of the risk factors we identify may occur in our central scenario, which is probably not yet fully priced-in by markets. It would take a combination of risk
TLTRO repayments and redemptions will drive incoming ECB passive QT over the next few quarters. So far, banks have repaid a small amount of liquidity, while the ECB’s recent decision on remuneration of excess reserves has helped keep current excess
The cross-section of options holds great promise for identifying return distributions and risk premia, but estimating dynamic option valuation models with latent state variables is challenging when using large option panels. We propose a particle MCMC framework with a novel
This paper proposes a weighted group neural network model and reexamines whether treasury bond returns are predictable when real-time, instead of fully-revised, macro information is used. Real-time macro vintage data and news-based topic attention are taken into account. We find
CROSS ASSET Investment Strategy While a global recession may be avoided, we are likely to see growth deceleration and high inflation (higher cost of living) along with regional divergences. Thus, investors should consider moving to a more cautious stance on
Economic cycles have been a crucial driver for financial markets, making regime-based dynamic asset allocation (DAA) a common practice in supporting optimal portfolio construction. Changes in key economic indicators, monetary policy trends and the evolution of financial leverage have proven
Abstract The most common models to assess asset returns are a linear combination of risk factors. We have employed tree-based machine learning algorithms to capture nonlinearities and detect interaction effects among risk factors in the EUR and USD credit space.
CROSS ASSET Investment Strategy: The current repricing is a reminder of a regime shift in which stagflationary concerns are becoming prominent. Investors should move towards quality segments in credit and equities, and aim to benefit from the regional divergences that
Explaining portfolio returns through Fama-French-Carhart models supposes linearity between returns and risk factors. It makes it possible to simply identify relationships as a linear combination of factors, while in reality, these relationships could be much more complex. In support of
Green and sustainable investment in emerging markets and developing economies (EMDEs) rebounded from pandemicrelated challenges to reach record levels in 2021. This report provides an overview of developments in the market for green bonds issued in these economies and for
Federal Open Market Committee (FOMC) meeting and statement: On 15 June, the Fed hiked the Fed funds rate by 75bp, to 1.50-1.75%, the first 75bp rate rise since November 1994. Chair Jerome Powell confirmed that recent readings regarding consumer inflation
We started the year with expectations of strong growth and high inflation throughout the first part of 2022. The Russia-Ukraine war accentuated the inflationary trend, now well above Central Bank (CB) targets, which is now set to persist longer than
Spain’s public finances and the trajectory of Spanish debt: The debt/GDP ratio rose to 120% in 2020 after the shock of the Covid-19 pandemic. The country’s debt and deficit sustainability face two main headwinds: a more adverse funding profile due
Italy’s public finances and the trajectory of Italian debt: The debt/GDP ratio rose to 150% in 2021, impacted by the shock of the Covid-19 pandemic. But we observe a somewhat stronger decline in the ratio for any given level of
Global economy is slowing, due to the fallout from the Russia-Ukraine war, supply bottlenecks and China’s zero-tolerance Covid-19 policy. CBs will tighten financial conditions to tame persistent inflation. A global recession is not our main scenario, but there are areas
Last year global sustainable debt issuance hit a record of over $1.4tn, with the overall sustainable debt universe expanding to near $3.4tn. In the first quarter of 2022 this healthy trend halted temporarily, as high energy prices and rising borrowing
Riding the Green Wave: Green and sustainable investment in emerging markets and developing economies (EMDEs) rebounded from pandemicrelated challenges to reach record levels in 2021. This report provides an overview of developments in the market for green bonds issued in
United States: After the contraction in Q1 (resulting from an outsized detraction from net exports and a payback from the surge in inventories in Q4, not from weak demand) we expect sequential growth to pick up from Q2 and stabilise
The idea that there is a comfortable degree of budgetary room for more active fiscal policy goes hand-in-hand with the assumption that a sustained bond correction (higher safe real interest rate) is not only unjustified based on fundamentals, but is
The rise of the narrative concept and how it can help financial market understanding. A narrative is a popular story that arises from the public consciousness of market events. The most viral and intense of these may dominate public attention.
Today climate change is arguably the most critical long-term challenge that humanity is facing. “Climate action failure” is not only the top longterm threat in the World Economic Forum’s Global Risks Report for 2022, but is also a key element
We keep the probabilities of our central and alternative scenario unchanged versus last month but amend the narrative to take into account the evolving geopolitical situation (see Ukraine crisis tree).The new wave of Covid-19 in China and stagnation in the
CROSS ASSET Investment Strategy – June 2022: The repricing of a more aggressive Fed stance has been brutal as the 10Y UST yield temporarily reached the 3% threshold, falling close to 2.75% recently on economic growth concerns. We think investors
The second quarter of the year is becoming increasingly painful for tech stocks, recalling memories of the 2000s tech bubble bursting. The repricing of a more aggressive Fed stance has been brutal, real yields rose – the rate on 10-year
Identifying, monitoring and preventing human rights violations is not only a government responsibility but also a corporate concern. Operations across a company’s value chain play a key role in human rights outcomes as reflected in the 10 principles of the
Diverging economic outlooks in Europe, US and China, along with persisting geopolitical risks, underscore the need to explore relative value opportunities across asset classes. On duration, we think investors should be flexible but no longer as short as they were
We are witnessing significant divergences in the economic outlook (we have revised down the EU and Chinese economic outlooks vs. the more resilient US economy) and in market performances. In particular: (1) Inflation expectations – short-term peak vs. long-term rise:
Inflation was already running well above central banks’ targets as we entered the year. The war has put additional pressure on prices and supply chains and this could have repercussions not just on oil, but on other commodities as well.
April meeting: No further acceleration of stimulus withdrawal was hinted at by the ECB in April. It confirmed both the previous guidance on QE (likely to end in Q3) and the policy sequence, with interest rates to rise at “some
Market assessment: After an initial negative reaction to the Russia-Ukrainian conflict, US equities markets are now above their pre-war levels. US equity volatility has proven much lower compared to Europe, which is more exposed to the crisis and to the
Ukraine: where do we stand? The first month of the Russia-Ukraine war has driven volatility up across the board, though with some recent signs of stabilisation in equity markets. Europe is the area most exposed to the war – in
Monthly update We keep the narratives and the probabilities of our central and alternative scenario unchanged versus last month. The war in Ukraine could evolve in several ways over the coming weeks (see Ukraine crisis tree) with significant implications on
The third year of the Covid crisis began with renewed concerns over the interplay between surging inflation and an economic recovery contingent on concerns over policy tightening, a trend further accelerated by the Russian-Ukrainian conflict. While we collectively gather ourselves
