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
We foresee calmer markets over the next few months and have identified several reversal themes: (i) The crude oil market has likely seen a top already as it priced in plenty of good news on demand, supply and geopolitics. (ii) Relative monetary policy divergence between the US Federal Reserve and the ECB is also largely priced in. We therefore expect the USD to stabilise against the EUR and the spread between German and US Treasury (UST) bond yields to tighten after almost a year of widening. (iii) More stable US rates markets and a stable USD should support emerging market (EM) currencies and therefore EM local debt.
In line with these views, we have recently taken a long position in US Treasuries versus German 5-year bonds and we will look for opportunities to add long EM FX exposure, for example by adding to our existing long EM local debt position.
The main risks to our bullish base case scenario could stem from an inflation surprise or an escalation of trade tensions that could lead to a global economic slowdown.
Our market dynamics analysis (technical dynamics analysis, financing conditions, market dynamics indicators, liquidity monitoring) had already flagged a change in the environment early in 2018, suggesting a more febrile market. In this context, we maintain our positive view on risky asset in the next few months, while we continue to monitor market movements closely.
Following a strong performance for risky assets in 2017, markets have experienced some challenging cross currents over the past few months. The market moves over the past three months are a good example of this new and more challenging environment (Figure 1).
Equity performance was mixed with positive returns in the eurozone, followed by the US, and EM equities trailing with negative returns.
Read our latest asset allocation flash update here