13 APR


Asset Allocation , Topics

We keep a constructive mid-term base scenario


  • We are neutral on equities. While keeping a constructive mid-term base scenario, we note an increase in downside risks, as the macro momentum is peaking and concerns about protectionism are intensifying.
  • We maintain our negative view on Europe ex-EMU, in particular UK equities. It is the only region where expected returns are relatively low.
  • Within the fixed income space, emerging debt remains our preferred asset class.


Economic Scenario

From a macroeconomic point of view, the global context remains supportive of riskier assets in the medium term. The world economy is growing and should expand further, thanks largely to stronger emerging market growth. This growth, which is being revised upwards, is also supportive of developed markets.

In the US, economic growth has accelerated over the past two years and, although Q1 growth is expected to be modest, it should accelerate in the coming months. US growth is driven by consumption, which is supported by strong job growth and higher household income, while exports continue to benefit from global demand and a weaker dollar. Economic growth is also being enhanced by Trump’s fiscal stimulus.

Also in the eurozone, broad-based growth – driven by domestic demand and, more recently, net exports – has accelerated. Despite the recent earnings strength shown by activity indicators, growth should remain strong, thanks to exports, investments and consumption growth.

The recent escalation in trade-war rhetoric poses a risk to our scenario of solid growth and moderate inflation.

Growth cycle

As expected, the growth cycle is less supportive today than it was a few months ago. The current expansion is continuing, but at a slower pace and with greater dispersion between the different regions and countries. Economic activity indicators are now more in line with real growth expectations, in particular in the eurozone. This ‘soft patch’ will remain a while yet, both in the US and in the eurozone. Meanwhile, the economic optimism of recent months has been challenged, especially in the eurozone, as economic surprises have dropped strongly.


With the exception of the Federal Reserve, all central banks remain highly accommodative. Despite stronger growth in the eurozone, the ECB can continue along the same monetary path thanks to low inflation (below its target by 2020), while the Bank of Japan is still full throttle. Financial conditions thus remain supportive and have barely changed in the EU and US.


The upcoming earnings season, publications and guidances will have an important impact on market performance. In the US, the elevated expectations have already been strongly revised upwards. Expected earnings growth is now close to 20%. In the eurozone, expectations are more modest, at around 8%, having been significantly revised downwards since the beginning of the year.


Meanwhile, investors are betraying signs of anxiety, following the increase in (geopolitical) uncertainties. They reduced the risk in their portfolios in March, with increasing cash allocations. They also adapted their sector allocations, as witnessed by the rotation towards more defensive sectors such as consumer staples and real estate. The threat of a trade war is investors’ main concern, followed by higher inflation.


Overall, our mid-term base scenario remains supportive of equities against bonds. Growth should remain robust, though visibility is becoming somewhat blurred outside the US beyond the second half of 2018. Inflation, although gradually increasing, is not of major concern to us, while monetary tightening remains progressive. Higher volatility might create opportunities, especially as equity market valuations have become less stretched after the recent corrections. Nevertheless, we are currently neutral in equities, as we see an increase in downside risks to our base scenario, such as the peaking macro momentum, accelerating monetary tightening and intensifying concerns on protectionism. Clearly, we are looking for a better entry point before adding risk to our portfolios.



US equities

EMU equities
We are currently neutral on US equities. We acknowledge the positive impact of Trump’s tax reform and deregulation, and the improving earnings growth. Nevertheless, US trade policy (incl. USD) appears as a major policy unknown as risks start to materialise.

EMU equities

The eurozone is still displaying a robust and geographically broadening economic expansion. Activity indicators are, nevertheless, showing signs of exhaustion, while economic figures are currently disappointing the market. The ECB remains accommodative, and in no hurry to become hawkish. Corporate earnings momentum has weakened and thus EMU equities currently lack new catalysts. This justifies our more cautious short-term view.

Europe ex-EMU equities

The Bank of England’s more hawkish monetary policy stance has put a barrier to GBP depreciation, challenging overseas profit growth. Brexit negotiations remain a risk, while negotiations on new trade relations don’t seem to be progressing much. The region also has lower expected earnings growth and thus lower expected returns, justifying our negative stance.

Japanese equities

Visibility on an accommodative policy mix and above-potential expansion remain good news for Japan. But the stock market is highly correlated with the performance of the yen, currently serving as a safe haven and appearing disconnected from the accommodative Bank of Japan.

Emerging market equities

EM equities are benefiting from improving fundamentals and stronger growth. The region would nevertheless be vulnerable in the case of a global trade conflict. In addition, the high weighting of the tech sector (28%) is adding volatility.


Negative on government bonds and corporates

Central bank monetary policy is tightening. The Federal Reserve is most advanced in its rate hike cycle, while the ECB should stop its quantitative easing in 2018 and start raising rates in 2019 at the earliest. In the meantime, inflation should increase gradually in line with the economic growth outlook. In particular, wages should start to rise in the US, with the tight labour market. In this context, 10-year interest rates should rise towards 0.9% in Germany and 3% in the US. This would also impact investment grade corporate bonds, given the low spread.

Neutral on high yield

High-yield spreads have reached our targets and pressures are starting to appear with the large outflows. We do not expect a continuation of the spread-tightening. The carry remains attractive, though.

Positive on emerging debt

We value the supportive environment for emerging debt and believe spreads can continue to tighten. The carry is among the highest in the fixed income universe and so are expected returns. It is also an attractive diversification.