LONDON (Reuters) - Market liquidity as well as dollar funding problems are likely to be the twin challenges for 2020 and Europe’s largest asset manager Amundi had built up contingencies for both, chief investment officer Pascal Blanque said.
Blanque, who oversees 1.4 trillion euros ($1.56 trillion) worth of assets, told the Reuters Global Investment Outlook Summit that while the China-U.S. trade war was unlikely to tip the world economy into recession, one consequence was that “the dollar liquidity that lubricates the system is challenged”.
That comes on top of worries that stringent regulations introduced after the 2008 crisis have eroded liquidity — essentially how easy or hard it is to convert securities into cash. The issue shot into the spotlight this year when exposure to illiquid assets forced asset manager Woodford to first freeze, than close an equity income fund.
“We’ve been building up liquidity buffers in the portfolio because we do think liquidity management will be key in this phase of the cycle. It will become obvious to markets that there is a tradeoff between risk/return and liquidity,” Blanque said, speaking via videolink from Paris.
Markets also got a scare in mid-September when overnight U.S. repo rates spiked to 10% - five times the fed funds rate at the time — sending banks scrabbling for cash and forcing the New York Federal Reserve to pump money into markets for the first time in a decade.
It subsequently prompted the Fed to resume asset purchases.
“We are living in a paradox where there is excess liquidity on (central bank) balance sheets but in terms of market liquidity we’ve got frictions ... It’s the non-observable part of the iceberg,” Blanque said.
He described the situation as a “turning point” because it is now crucial that investment decisions take a view on liquidity — within portfolios as well as on markets.
Aside from building a toolbox to calibrate liquidity buffers for various levels of market stress, Amundi has also been de-risking portfolios in recent months, shaving equity exposure and favouring assets that are less exposed to the trade slowdown such as in big emerging economies such as Indonesia and India.
The dollar issue in particular raised the risk of sudden spikes in liquidity and volatility, Blanque said, adding:
“I don’t know when but we will face this kind of challenge and I feel well prepared.”
Despite the uncertainty, Blanque considers a global recession as unlikely. He believes markets expect too much stimulus still to come from policymakers.
“There is a confusion between global growth and global trade. The retreat of trade as a contributor to growth does not mean full blown recession,” he said, noting still-robust consumption and the effect of years of stimulus.
But this does signal more bond volatility, he said, adding; “The stellar performance of defensives and bond proxies is probably behind us.”
Blanque also said that for next year he favors:
* Positioning in high-quality and cyclical stocks in Europe
* The “resilience theme” — consumer or telecoms sectors in developing countries that are insulated from trade winds
* Some high-yielding emerging market currencies
* European banks: priced for the worst, the worst unlikely
* Reducing bias for being long credit; bond proxies too expensive
* Global recession unlikely even if global trade shrinks
* Expects U.S. Fed to cut interest rate once more
* FX volatility could become part of landscape again; investors should rethink hedging strategies
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Additional reporting by Ritvik Carvalho; Editing by Alison Williams