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Expert Opinions

Defensive bias stages a comeback amid trade uncertainty

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Macro releases have in large part confirmed our views for 2020 with regard to resilient growth and low inflation, especially in the US and Germany. Regarding the scenario asset classes, in the short term, we continue to believe that the US and China will have limited choices aside from striking a trade truce.

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Defensive bias stages a comeback amid trade uncertainty
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Weekly recap: Defensive bias stages a comeback amid trade uncertainty

Macro releases have in large part confirmed our views for 2020 with regard to resilient growth and low inflation, especially in the US and Germany. US Q3 GDP was revised up 20bps to 2.1% while Q4 estimates were also revised up. Meanwhile, the core PCE deflator, at 1.6% YoY in October implies that the Fed will remain dovish.

The US approval of the Hong Kong democracy bill, and question marks on the “phase 1” trade deal with China, were significant drivers of defensive market segments. Long-dated yields fell across developed countries in recent weeks, while health care and real estate stocks outperformed in the US and the EMU.

Scenario Asset Classes: Buy UK domestic stocks, tactically

In the short term, we continue to believe that the US and China will have limited choices aside from striking a trade truce. The Dec. 15 deadline is rapidly approaching, and both economies are decelerating. We expect the US to at least postpone the next tariff hike if no agreement is reached before that milestone. A rollback of previous tariffs would now be a surprise, supporting risk assets and cyclical sectors.

In the UK, polls point to a comfortable majority for the Tories in the Dec. 12 general election. If the polls are right, Brexit should be delivered by Jan. 31. We enter a tactical buy recommendation on both the GBPUSD and the FTSE 250 (domestic-oriented stocks) to leverage that view. But the UK economy is decelerating, and we are sticking to our neutral stance on UK equities strategically. On fixed income, we prefer Gilts vs. Bunds.

Beyond Hong Kong, civil unrest continues in EM countries such as Chile, Ecuador, Bolivia, Colombia, Iran, Iraq, Lebanon, Egypt, Sudan and so on. Thus far, the top 10 countries in EM HC debt benchmarks, such as the EMBI Global Diversified, have been spared. We stick to our OW stance on the asset class and will continue to monitor the situation.

Monitor PMIs across countries and sectors with a handful of market movers ahead. There have been signals of a continued rebound in manufacturing on preliminary estimates. But keep a close eye on services, however.