Volatility: is it an opportunities?

The first half of 2018 was tumultuous to say the least. Macroeconomic and microeconomic events have shaken markets and led to poor performances across asset classes. However, we remain confident for the second half of the year, for two main reasons:

1. Even if growth did not accelerate since the beginning of the year, geopolitical tensions are unlikely to plunge the economy into recession. Moreover, business leaders remain extremely optimistic about the level of order books.
2. European fund flows seen year to date, although disappointing for most asset classes, remain robust on equities.

However, three major risks should be monitored:

• The mini oil shock: the price of oil rose from $25 to $75 in two years, weighing on the growth of importing countries, notably Europe.
• Protectionism: Trade barriers have moved from threat to reality. While the impact on growth is still anecdotal, it has already affected investor confidence.
• The rise of populism: the elections in Italy with the victory of the so-called “Eurosceptic” parties caused a crisis on European markets. However, we believe that Italy will be open to compromise and that tensions with Brussels should ease with the opening of negotiations.

One thing is certain, though: Market volatility will remain high.

We remain positive on risky assets. We prefer US equities to European equities, particularly the technology sector, which continues to enjoy impressive growth and an attractive risk/return profile. In Europe, we recommend positioning in mid caps (less sensitive to an increase in trade barriers) rather than in small caps for liquidity reasons.

Mario Draghi’s confirmation that ECB rates should not be raised until summer 2019 offers, in our view, a good entry point for European real estate stocks to take advantage of their attractive returns (4.8% on average).

As far as fixed income is concerned, we remain cautious. The normalization of monetary policies and the risk of a rise in long-term rates lead us to favor short-term high-yield bonds.

Finally, the normalization of monetary policies with the end of the unconventional “quantitative easing” measures means increased volatility. Certain asset classes, such as private equity or private debt, offer a potential escape from such volatility while offering promising prospects.

We must keep in mind that this volatility will offer multiple opportunities on the markets: it is going to be bumpy folks, the ideal playing field for active managers!