- The global economic context is supportive to risky assets, with both the Eurozone and Japan growing above their potential.
- (Geo)political uncertainties remain – to different degrees – at the forefront. In the US, the fiscal agenda will have regained investors’ attention by mid-December.
- On a mid-term perspective, central banks’ less accommodative stance will gradually push interest rates high.
Global expansion dynamic well underway.
- The outlook for the world economy appears solidly anchored above 3% growth for this year and next, while inflationary pressures remain subdued. Both the Eurozone and Japan have grown above their potential, despite currency strength since the beginning of the year. In the US, economic surprises have finally returned to positive territory, despite the noise from the hurricane season. Emerging markets remain fundamentally sound, although the temporary USD strength represents a (temporary) headwind.
Political risk the main obstacle in the current context.
- Despite the recent political tensions in Catalonia, Spain, political risks have eased in the EMU. In the US, although we notice signs of a certain legislative progress in pro-growth policies, we remain vigilant, as both debt ceiling and government funding discussions are looming. Also, the upcoming reshuffle of the Fed Board of Governors is adding to fiscal-policy uncertainties but should be clarified soon.
Central-bank dovishness to recede.
- Market perception is that both the Fed and the BoE have become more hawkish, strengthening their currencies. The Fed started its balance-sheet reduction in October and is expected to hike its policy rates once more by the end of this year. Meanwhile, in Europe, imminent ECB tapering announcements are expected, in line with economic robustness, while the Bank of England wants to reverse the post-Brexit easing at its next meeting in November.
CROSS-Asset strategy: tactical and regional portfolio positioning
GENERAL OVERVIEW: Equities vs. Bonds
Equity markets – boosted by new reflation hopes – have performed well since early September, after better-than-expected economic figures and less hawkish central banks. The International Monetary Fund expects the world economy to accelerate, thanks mainly to emerging-market growth. However, the developed countries, too, are doing well. Eurozone economic activity is growing apace, and economic figures have also recently started to improve in the US, despite the noise from the impact of the hurricane season. This good economic momentum is also benefiting companies. Earnings growth is expected to be double-digit in the Eurozone and emerging markets, and high single-digit in the US. Apart from that, valuations still look appealing in most regions, both in absolute and in credit terms. In this context, and taking into account a gradual interest-rate hike in the coming months, we continue to clearly favour equities over bonds.
REGIONAL EQUITY STRATEGY
EMU and Japan should outperform
We have a neutral stance on US equities.
- The recent improvement in economic surprises is a positive for US equities. However, the US’s fiscal agenda is about to cause some uncertainties. The US has three main challenges that should have surfaced by mid-December: fiscal-stimulus execution, debt-ceiling debates and 2018 budget negotiations.
We are positive on EMU equities.
We are negative on Europe ex-EMU equities
- Recent data confirm the ongoing, more robust and geographically broadening economic expansion in the region. An accommodative central bank and strong corporate earnings momentum underpin the attractiveness of the region’s risk assets, which are no longer subject to a major political-risk premium. The pause in the recent increase in the Euro currency is further supporting EMU equities.
We remain positive on Japanese equities
- Beyond the difficult Brexit negotiations, the shift in the BoE’s monetary-policy stance has put a halt to GBP depreciation, weakening the repatriation of the overseas profits realised by UK corporates. We continue to shun the region.
We (temporarily) reduced our emerging-market exposure
- Despite the snap election, political risk should be limited. As the BoJ will not join other central banks in tightening its monetary policy anytime soon, a weaker JPY remains a strong conviction. In addition, strengthening growth and a supportive domestic policy mix are acting as the main performance drivers.
- EM equities have performed well, thanks – until early September – to improving fundamentals and USD weakness. Despite strong fundamentals, we nevertheless decided to partially lock in profit, as we expected a slightly higher USD by the end of the year.
FIXED INCOME STRATEGY
Negative on government bonds
Interest rates are expected to creep up gradually.
- We recognise several reasons for this, the main grounds being the tightening Fed, improving European economy and possible ECB tapering.
We are neutral on credit.
- As spreads have already tightened significantly and a potential increase in bond yields could hurt performance.
On emerging-market debt.
- The ongoing monetary easing is particularly supportive to this asset class.