AXA WF Global Income Generation

October was marked by a slight increase in optimism linked to a possible resolution of the Brexit and a reduction in the risks associated with the trade war. In the United States, the manufacturing sector continued to be a drag which is starting to be reflected in real data even though Q3 GDP growth was virtually stable at +1.9% qoq annualised, due to robust household consumption. The ISM Manufacturing index fell to 47.8 in September, the lowest since 2009 before rebounding to 48.9 in October. The Non-Manufacturing ISM also fell to 52.6 in September, its lowest level since August 2016. Employment has also decelerated, with net job creations currently at 160,000 per month, compared with 220,000 in 2018. Meanwhile the Trump administration announced the postponement of the 5% tariff increase on imports of Chinese products in exchange for China accepting some US conditions. Regarding the impeachment proceedings against President Trump, the House of Representatives officially validated the opening of an investigation. Finally, the Fed decided to again lower its key rates by 25 bps [1.50-1.75%] although stating that it would take a significant deterioration in the economic backdrop to cut in December. In the euro zone, GDP growth was +0.2% qoq, in line with the second quarter. France and Spain continued to resist the slowdown in world activity (+0.3% and +0.4% respectively), Italy surprised to the upside (+0.1%) while German GDP (expected to be flat) will only be released mid-November. The October flash PMI surveys in the euro zone point to a stabilisation of activity. As expected, the ECB left its monetary policy unchanged at its October meeting without divulging further details. In Italy, political turmoil returned to the fore as the new coalition suffered a major defeat against the right-wing/extreme-right alliance, led by Mr. Salvini, in regional elections. In Spain, the sentencing of Catalan independence leaders triggered waves of mass demonstrations in Catalonia. In the United Kingdom, a new agreement was reached with the European Union, but the latter could not be validated before the October 31st deadline. Boris Johnson was then forced by Parliament to request an extension which was accepted by the EU until January 31st. Finally, PM Johnson managed to call early parliamentary elections for December 12th. Currently, polls indicate that the Conservatives are quite clearly in the lead. In Asia, the impact of Japan’s VAT increase on October 1st seems to have been less significant than in 2014, helped by the government's compensation measures. However, Japanese activity should mechanically decline in the 4th quarter following the sharp rise in consumption in September (due to anticipated purchases ahead of the VAT). Finally, the BoJ decided to maintain its ultra-accommodating policy but opened the door to a possible rate cut. In China, GDP growth in Q3 fell to 6% yoy, its lowest level in over three decades. The manufacturing sector, impacted by trade war, is at the origin of this slowdown in activity. Domestic activity held up better, supported by fiscal and monetary policies. Despite some positive short-term developments, particularly in industrial production and retail sales, the trend is still towards a further slowdown. Equity Markets moved higher in October as trade tensions eased and macro data ceased surprising to the downside. In the United States, the S&P500 index moved up +2% and in Europe, the Eurostoxx 50 increased +1% albeit with varying performances across the different bourses of the region: the German DAX rebounded +3.5% whilst the French CAC moved up merely +1%. Peripheral markets also diverged with the Italian MIB increasing +2.7% whereas the Spanish IBEX was stable (+0.1%). In the United Kingdom, the FTSE 100 declined -2.2% in reaction to the sharp rebound of the British pound following the deadline for Brexit being pushed out once again. Asian markets reacted very positively to a potential trade truce with Japan’s Nikkei and Topix indices jumping +5.4% and 5% higher. In China, Hong Kong's Hang Seng Index moved up +3.1% while the Shanghai Composite increased a lesser +0.8%. Emerging markets (MSCI EM Total Return Index) also rose +4.2% in USD and +1.8% in EUR. Most bond markets slightly pared back their recent gains as the recent data was in line or above expectations. The Fed’s resolutely dovish stance allowed US 10-year yields to remain stable at 1.7% whilst German 10 year Bund yields moved higher to -0.41%. Same for French 10-year OAT yields which increased to -0.1%. Italian 10-year BTP and Spanish BONOS yields also moved up to 0.9% and 0.2% respectively. The yield on 10 year British Gilt increased to +0.63%. Similarly, Japanese 10 year JGB yields rose to 0.1%. In credit market, spreads were close to stable for IG but diverged for High Yield with a narrowing of spreads in the US but widening slightly in Europe. With regards to currency markets, the US dollar weakened as indicated by the dollar index which declined -2%. The Euro appreciated +2.23% to 1.09 and the British Pound jumped +5.3% higher to 1.29 against USD although the Japanese Yen was stable (+0.2%) at 108. On commodity markets, the Bloomberg Commodities Index excluding agriculture and livestock increased +2.1% on optimism over the easing of trade tensions. Oil prices moved higher (Brent +2% to $60 a barrel albeit flat at $54 for WTI) as did Industrial metals with copper moving slightly higher (+1.2%). Gold also increased +2.6% to just over $1,500 an ounce. The portfolio risk over the month was increased as the fund allocated cash into underlying equity strategies and thereby closed the allocation gap to the long-term average weighting for equities, predominantly in developed markets but also a smaller allocation was made to emerging market equities. Cash was also allocated to the Global Investment Grade Credit strategy thus the overall impact has been to increase the income generating capacity of the fund. We expect risk markets to remain supported by central bank policy accommodation through the channels of rate cuts and asset purchase/liquidity provision programmes. This argues rather more in favour of high dividend equity risk over high yield credit and hence the overall allocation has begun to be tilted to take this into account. The fund currently is positioned with an 83% allocation to income generating assets, up from 79%, and 16% to long term growth strategies.