Our main scenario in the current quarter is that companies will begin layoffs and asset write-downs in a kitchen sink operation to lower the baseline so comparable figures become better in 2020. As a result, we expect employment figures to worsen in the fourth quarter and we also expect global earnings growth to go negative causing global equities to sell off. Tactically investors should still be underweight equities and defensive within the equity exposure through equity factors such as minimum volatility and quality. Companies with significant debt leverage on the balance sheet should be avoided at all cost.
As the macro picture deteriorates the USD will continue to strengthen as we have seen in previous weak periods. The incident in the USD repo market is a sign of regulation introduced in the wake of the financial crisis gone wrong. There is a scramble for USD in the global financial system and major US banks are incentivized to lower their balance sheets toward year-end because as global systemically important financial institutions they have a capital surcharged.
As we write in our Q4 Quarterly Outlook (released tomorrow) the USD is killing growth and we expect the next policy move to be actions to prevent the USD from rising more and basically starting a new regime of weaker USD. This will ease financial conditions and help economic growth. The big move towards fiscal policy being more active and resemble modern monetary theory will come later. When we get the signs that the USD is being forced to weaken then investors should consider underweight US equities and overweight global equities ex-US and emerging markets as historically this has been the case whenever the USD weakens in real terms (see table).