30 AUG

2018

Asset Allocation , Asset Class

Global equities are supported by solid earnings growth and valuations are attractive

EXECUTIVE SUMMARY

  • We maintain a positive grade on equities with preference for EMU, US and Emerging markets.
  • We are negative on government bonds and prefer emerging debt.
  • We expect the USD-strength to ease in the coming months.

MAIN CONVICTIONS

  • Increasing risks, such as the trade war, a slowdown in emerging markets and political risks in the euro zone could impact the global expansion.
  • Global equities are supported by solid earnings growth and valuations are attractive.
  • We are positive on EMU, US and Emerging markets equities

 

 

GLOBAL CROSS-ASSET STRATEGY

Financial markets continue to be reigned by (geo-)politics. In the US, President Trump is taking “America First”, as promised. On the one hand, his fiscal reform has given him time and lets the economy enjoying months of a more solid growth. On the other side, Trump is in an escalating vicious circle of tit-for-tat retaliation with China, and it only seems to be just the beginning. A further escalating trade conflict could eventually affect global growth, even though the US are spared for the time being.

As a result, it comes as no surprise that the potential trade war is the topic of the month in emerging markets. It is considered to be the biggest tail risk by investors. Hence, their current valuation integrates a higher risk premium than other regions. One of the key elements will be the evolution of the exchange rate between the USD and emerging markets currencies. Some emerging markets central banks are already under pressure to tighten their reference rates and it remains to be seen if their economies can handle it in the current context. China is already using the tools at its disposal to support its already slowing down growth and mitigate the impact of the trade war. The Chinese Renminbi has lost approximately 10% against the USD since early April. Although it felt a bit like August 2015, there is currently no contagion or panic.

Meanwhile, the euro zone has managed to appease Trump’s wrath, when Jean-Claude Juncker, President of the European Commission, met the US President in the White House. Tariffs threats are suspended, while an executive working group has started serious negotiations. Tariffs on the automobile sector would have a material impact on global growth. If global growth has resumed its synchronization, it is at a lower than expected level for the euro zone. The major headwind is the rise of Euroscepticism , while “Brexit” negotiations, negotiations with Trump on various trade relations, including automobiles, and Italy’s new budget plan are adding to the region’s political uncertainty. On the bright side, July shows that in terms of economic surprises, the regional momentum has turned more favourable for the euro zone.

In this context, we definitely stay constructive on equities. Economies are growing, the business cycle keeps moving forward, the Q2 earnings season surprised positively and valuations are attractive against other asset classes. Our 1Y expected returns are close to double-digit growth for our preferred equities markets, which are concentrated on the US and emerging markets. In the meantime, we maintain some cautiousness on credit and a negative tilt on bonds with the exception of inflation-linked bonds and emerging markets debt. Main risks to our base scenario include the trade war, a potential emerging markets slowdown, a resurgence of political risks in the euro zone and an overall deterioration of international relations.