Macro Cocktail – Cheers to Central Banks
Beginning of December Banque Transatlantique London Branch hosted a Macro Cocktail at The Ciné Lumière II at the French Institute in South Kensington.
Luca Carrozzo presented the performance of the main equity and fixed income markets. For 2019 the performances are very good, with main equity markets trading around 20%-25% year to date. In his opinion, the main driver for these excellent 2019 results is the expansive monetary policy of central banks.
Central banks, and especially the US Federal Reserve, started after the financial crisis of 2008 to inject big amount of money into the system in form of asset purchase programs, also called Quantitative Easing (“QE”). These asset purchases are ensuring the stability of the financial system against further turmoil in short-term lending markets. As a result of these purchases, longer dated rates come under pressure. In fact, by purchasing Treasuries from 2008 onwards, the Fed stimulated demand, pushing prices higher and sending yields lower. The US central bank started to normalize their monetary policy in 2015 by raising the main refinancing rate and reducing their balance sheet. But since this year, Chairman of the Fed, Jerome Powell restarted to increase the balance sheet and to lower the main refinancing rate. These measures were cheered by the financial markets.
Moreover, Luca Carrozzo explained the disconnection between the very positive equity market and the global economy. While the financial market had a strong year, the global economy suffered from a slowdown. In his opinion the trade war between China and the US was the main driver for a cooldown of the world economy. Furthermore, Brexit and other increased political risks around the world were additional reasons to dampen global economic growth.
For the coming year, Luca Carrozzo has a reasonably positive outlook. He first anticipates that in 2020 investors will face more volatility than this year. Secondly he highlighted different topics which could concern investors. One of these apprehensions is the high US debt level, but also the presidential election in November and the negotiation between the European Union and the United Kingdom after Brexit. However, choosing Christine Lagarde as the new President of the European Central Bank to replace Mario Draghi is an interesting change. Mrs. Lagarde is, in many ways, an unconventional choice to lead the ECB. Unlike most central banking heads, the former IMF president is not an economist and she has never devised monetary policy. The jury is still out, but she may represents a shift to a more political ECB, which could bring new opportunities for the European Union. She is expected to use her power of persuasion to convince governments within the EU to increase spending. Persuading them not to rely on monetary policy, she could push them towards new fiscal measures.
Luca Carrozzo concluded his presentation with some recommendations for the portfolio construction. Firstly, it is important as always to have a well-diversified portfolio. Secondly, investors, with an equity exposure, should focus on quality stocks, which means in companies with good revenues, solid balance sheets and positive cash flows. These companies with global brands should be more resilient in case of a market correction. The last important point in his opinion, is to find investments in long-term megatrends, these kind of secular investments are likely to become more and more important and offer interesting investment opportunities in the long run.
The next Macro Cocktail will take place in spring 2020.
 Luca Carrozzo is Deputy Chief Investment Officer of CIC Switzerland and also works as Senior Investment Analyst for BT London. He has been part of the group since 2009.