So far so good, but markets underestimate risks
SUMMARY: US equities continued to outperform other markets such as EMU and EM equities. This partly reflects the divergence between the US economy -which is supported by fiscal expansion and a patient Federal Reserve- and relatively weaker growth in the eurozone and EM. But there is more to this divergence than faster US economic growth. The US equity rally has been led by the IT sector. This has accounted for 20%-50% of US equity returns since 2016. The rally is now looking stretched on various metrics. The other salient development in August was renewed stress in emerging markets (EM). A combination of economic stress in Turkey, weaker growth in China, Sino-US trade tensions and a stronger US dollar hurt EM assets. We believe there is value in EM assets, but the obvious circuit-breakers are still absent: a weaker USD, aggressive China stimulus and fresh Sino-US trade talks. EM assets prospects have soured and protectionism and tighter liquidity continue to cloud their longer-term prospects.
Foreseeing calmer markets over the next few months, we have identified several reversal themes
SUMMARY: Despite trade tensions, concerns about global growth and more volatile markets than in 2017, our base case scenario remains one of robust global growth and contained inflation. This underpins our bullish view on equities, with a preference for eurozone equities where we see positive earnings growth prospects and room for margin expansion
Three stocks hit markets: (i) an escalation of political risk, (ii) weakening growth (notably in Europe); and (iii) a stronger USD, which led to stress in emerging markets In Italy, market worries about fiscal excesses and the prospect of a clash between the new government and European authorities escalated. As a result, ‘peripheral’ eurozone debt sold off. Italian markets are likely to remain volatile in coming months as investors digest further news on political developments and economic data There are signs of a growth slowdown, notably in the eurozone, according to recent data. However, we find it difficult to call a turn in the economic cycle yet. While the data have weakened, activity is still expanding both in the developed world and emerging markets Emerging market stress was largely a consequence of higher US yields and USD strength. In our view, local debt offers value and currently lower US yields are reassuring, but we need to see the USD and global risk sentiment stabilise for EM debt to rally materially
SUMMARY: As in February, US Treasury yields rose to the point where they ended up rocking markets, but this time the disruption was more visible in the US dollar and emerging markets than in equity markets / We see several factors for the rise: (i) US inflation and crude oil prices hit 2018 highs in April, (ii) US macroeconomic data have been robust enough for the US Federal Reserve to continue normalising its interest-rate policy, and (iii) rates markets have become more concerned about US Treasury debt issuance / The bar is quite high for further interest-rate increases in the near term, but when policy tightening does resume, we think this will not keep equity markets from rallying as long as the growth backdrop remains solid / The stronger USD reflects disappointing economic activity data in the G10 and emerging markets compared to the US. This is consistent with markets pricing in reduced expectations of central bank policy normalisation in Europe and Japan / Further USD strength is possible, but we doubt it can persist in the medium term unless the prospects for growth in the US continue to decouple from those for the rest of the world
Concerns over inflation, less central bank accommodation / trade protectionism escalates / activity data disappoints / reducing equity exposure, macro view unchanged / adding to EMU duration underweight
SUMMARY: Market review: the rebound in risky assets is ongoing, but prices are still below the pre-correction highs / Should we worry about inflation? We see a modest pick-up rather than a take-off / Can equities perform in a rising rate environment? Yes, but typically driven by strengthening earnings growth / Which safe assets can offer protection in Fed tightening cycles? No silver bullet; bonds may not offer shelter
SUMMARY: Global equities sold off aggressively as higher bond yields finally dented the strong January risk rally / The sell-off was triggered by strong hourly earnings data in the US, but its magnitude appears to be exacerbated by market technicals / Solid growth fundamentals and limited contagion from the equity volatility to other markets such as rates, currencies and emerging markets (EM) are consistent with a technical dislocation in markets
SUMMARY: Over the fourth quarter, economic developments continued to be positive.
SUMMARY: US and Japan led the equity rally in November; Europe and EM lagged / Cyclical momentum persists in the eurozone and in the US / Inflation remains subdued in the developed world / EU and UK agree Brexit terms, but GBP could remain under pressure
SUMMARY : Upbeat market in October, led by Japanese equities / ECB asset purchase ‘recalibration’: still accommodative / EM: renewed idiosyncratic risks?
SUMMARY Market summary: equitier climb higher in low-vol environment Crude market outlook - the new oïl era Asset allocation: long EM versus DM
SUMMARY • Risk assets: under the weather • Upbeat global growth • Asset allocation: back to underweight duration, still bearish on euro versus US dollar
SUMMARY • Inflation continues to disappoint • Are central banks debating a change in their reaction functions? • Bond markets are becoming unsettled
SUMMARY • Inflation disappoints, but central banks carry on • Is growth becoming more domestic? • Now closed: underweight in developed equities • Overweight real estate rotated from Europe to US
SUMMARY • Macron victory was mostly discounted • Some growth indicators rolling over • Concerns about China return • Now underweight UK vs eurozone equities
SUMMARY • Descrepancy between more bullish soft data and modest hard data continues • Fed and ECB can shrug off inflation pressures • Strength in riks assets looks set to fade • Now overweight emerging market debt in local currency, commodity underweight closed
SUMMARY • Markets are ignoring political uncertainty • Global economy may struggle to live up to positive leading indicators • High earnings expectations • Overweight European real estate; duration exposure reduced
SUMMARY • Markets digest policy uncertainty in the US • Monetary tapering in 2017? • Now underweight US high-yield
SUMMARY ASSET ALLOCATION • Stronger growth and inflation… • but no need for central banks to react quickly • Equity markets have risen too quickly
SUMMARY ASSET ALLOCATION • Poltical events dominate • Growth momentum improves • Selectively reduced equity underweight
SUMMARY ASSET ALLOCATION Leading indicators improve, growth concerns remain Monetary policy changing course? Interest –rate concerns hit equities
SUMMARY ASSET ALLOCATION Growth improves, but not strong Fed to hike in December, gradual in 2017 Bank of Japan will target 0% ten-year yield Asset allocation: limited upside for oil prices
● Will low market volatility last? ● Debate about rate hikes in the US takes new twist ● Other major central banks still easing ● Asset allocation: underweight equities with a hedge
● Risk assets quickly rebound after UK referendum ● Safe havens have remained in demand ● UK referendum a regional shock… ● … with global implications for monetary policy ● Challenging investment climate
● Growth in developed economies set to converge ● Bank of Japan does not give in to expectations ● We prefer US and Japanese equities over Europe ● Overweight in US credit now closed
SUMMARY INVESTMENT CLIMATE ● Growth in developed economies set to converge ● Bank of Japan does not give in to expectations ● We prefer US and Japanese equities over Europe ● Overweight in US credit now closed
Summary investment climate: ● US no recession but modest growth ● No decisive rebound in manufacturing yet ● ECB and Fed more dovish ● Markets may be complacent
Summary investment climate: ● Services PMIs converge with weak manufacturing ● US: low growth but no recession ● Will China reach its lower growth target? ● Tough climate for risky assets
Summary investment climate ● ECB and the Fed ready to move ● Chinese renminbi IMF SDR basket ● Asset allocation de-risked
Summary investment climate ● ECB gives strong hints for policy action in December ● Fed plots course for rate hike before year-end ● Is the market rebound sustainable?