Strategists are telling investors to prepare for both the best and the worst outcomes as risk assets around the world reach a crossroads.
Global markets are facing a number of positive catalysts in 2019. The Federal Reserve’s in a wait-and-see mode, and the European Central Bank has begun upping its stimulus. Economies around the world are growing and the US is looking relatively healthy. China is using both monetary and fiscal policy to spur its economy.
But at the same time, corporate earnings look weaker, there’s a threat a US-China trade deal could fall apart and Brexit will remain unresolved. And all of this is tied to concerns a slowing global economy could fall into a recession.
“Markets face a tug of war between weaker cyclical indicators and improving monetary conditions,” Societe Generale SA strategists led by Alain Bokobza, the head of global asset allocation, wrote in a report.
“Our allocation aims to position investors for the tug of war,” by buying positions “in a kind of barbell structure, adding risks and new protection in tandem.”
Some strategists are coping with the plethora of tail risks, both up and down, by offering a little of everything.
“Our US economists expect growth to rebound in the second quarter, but the risk of worse outcomes has risen” and made low-cost hedges like put-option spreads on the S&P 500 attractive, UBS Group AG strategists led by Stuart Kaiser wrote in a note. “For upside exposure to improving second-quarter growth we still like call options on Banks (KBE) and DAX calls to position for better trade outcomes and/or a bottoming in euro-zone growth momentum.”
Morgan Stanley went a step further, telling investors “don’t buy into Goldilocks,” the scenario of solid but noninflationary growth. The market is too confident in that central idea and too dismissive of the “tails” in both directions, strategists led by Andrew Sheets wrote in a note.