16 AUG


Asset Allocation , Topics

The global expansion continues

Executive Summary


  • The Eurozone-led global expansion, despite the recent slight setback in activity, continues.
  • Although the central banks are inching towards a very gradual tightening, monetary policy divergence should remain.
  • The key question for the coming months will be the resilience of equity markets to this tightening bias.
  • Constructive on equities, we are tactically reducing our overweight exposure to USD as the EUR/USD exchange rate has broken key resistance levels.


Main convictions

The global expansion continues, remaining at a high level despite the recent slight setback in Eurozone activity. In the meantime, Eurozone GDP growth has gained further momentum, with sentiment reaching new highs. Meanwhile, in the US, economic surprises continue to recover from extreme negative levels amid a much better 2nd quarter, with an annual GDP rate at 2.6% in Q2, while national account revisions depict a marginally less dynamic activity year-on-year. However, the IMF revised down US growth expectations for 2017 and 2018 on the prospect of a subdued fiscal stimulus. Despite this overall positive global momentum, the inflation rise is taking longer than expected to materialise and will be driven by both oil-price evolution and exchange-rate developments. Also, although protectionism fears have decreased (China, NAFTA), they have not completely disappeared. In this context, we are overweight on equities and have strong regional convictions in favour of an allocation to EMU, Japanese and emerging market equities, while keeping a short duration bias.


  • The political risk has switched from Europe to the US.

We think that we are past the peak of EMU policy uncertainty following the elections in France and an Italian risk that appears manageable on a medium-term horizon and is already priced-in by markets. In the US, the collapse of the healthcare reform in Congress has undermined Donald Trump’s progress on promised reforms and fiscal plans while his approval rating is falling. Slippage in the timing of the fiscal stimulus bill continues to be a source of uncertainty. We are waiting for more clarity before becoming more constructive: domestically, on US reflation through fiscal stimulus, tax cuts and regulatory easing; internationally, on geopolitical tensions with Syria, Russia, Iran and North Korea.


  • Central banks are at the forefront but a monetary policy gap between both sides of the Atlantic should remain.

Investors seem too complacent about Fed policy adjustments as they have not yet priced in one hike by the end of the year and barely priced in another next year. However, the Fed could start reducing its balance sheet in October and accelerate the pace of its balance-sheet reduction next year. Investors, on the contrary, are much more cautious about the impact of the ECB decisions although the Bank will likely continue to expand its balance sheet in 2018 despite an upcoming tapering announcement. The symposium in Jackson Hole held later this month should shed more clarity.



Tactical and regional portfolio positioning

GENERAL OVERVIEW: Equities vs. Bonds

The global context remains supportive for equities versus bonds from a medium-term perspective. Equities continue to appear more attractive than bonds in terms of valuations and expected returns. US economic news flows have bottomed out from extreme negative levels but they are still lagging relative to the Eurozone and Emerging markets. However, European equities did not benefit from this economic outperformance due to the recent Euro appreciation, which should lead to further weakening in relative earnings revisions. Looking forward, we expect the EURUSD exchange rate – supported by monetary policy divergence – to stabilise. Furthermore, investors remained confident as volatility indicators are currently at low levels and European equities keep recording inflows.

The key question for the coming months is the resilience of equity markets to the (gradual) tightening bias. Uncertainty about geopolitical risks,  inflation and the recent euro appreciation all urge central banks to remain cautious.



Positive on equities, especially for EMU, Japan and Emerging markets

    • We have a neutral stance on US equities. The US soft patch could now be behind us and economic surprises are improving. Nevertheless, the execution risk we continue to identify in the announced fiscal stimulus is leading us to revise down our profit expectations. Earnings growth, which could increase by 7%, is currently dependent on fundamentals, which remain supportive.
  • l We are positive on EMU equities. An ongoing, more robust and geographically broadening economic expansion, an accommodative central bank and a strong corporate earnings momentum all underpin the attractiveness of the region’s risk assets. Earnings-growth expectations have been revised downwards as the Euro appreciation could hurt European exporters, although strong domestic demand should support them. In this context, we prefer Italian equities and EMU small caps as they are relatively immune to the currency’s appreciation due to their strong domestic exposure.

  • We are negative on Europe ex-EMU equities. The uncertainties of Brexit conditions and their impact on the economy are keeping us away from the region. Domestic fundamentals are weakening and downside risks remain. We have already revised down our profit-growth expectations.

  • We have a positive view on Emerging market equities, which are benefiting from attractive valuations in a robust global growth context. US dollar weakness, along with the US soft patch, have supported this region, which has outperformed. Although Fed balance-sheet adjustments could create more uncertainties on Emerging markets, the global cycle and accommodative monetary policies should support them.

  • We are positive on Japanese equities. Strengthening global growth and a supportive domestic policy mix are among the main performance drivers and we are now more convinced that the BoJ will not join other central banks in tightening its monetary policy anytime soon, which should lead to a weaker JPY.

  • As global growth has firmed compared to the past two years, the key risks going forward are (geo)political.


Negative on government bonds, short duration

  • EU and US sovereign yields, which have increased in recent weeks, should – driven by a tightening Fed and potential upcoming inflation pressures – continue their uptrend. We expect rising wages and potential stimulus to push inflation higher, although both are taking longer than expected to materialise. Potential US protectionist measures remain a wild card.

  • The improvement in the European economy could also lead to higher EMU bond yields, as political risks are receding and the ECB should start detailing the next step in its tapering this fall.

  • We have a neutral view 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 represents an important support; this is our preferred fixed income thematic.




  • Oil prices should stabilise as US production has stopped increasingwhereas OPEC production has spiked, mainly due to Libya and Nigeria, which were exempted from the production-cut agreement. As a result, the price of oil (Brent) had reached $52 by the end of the month and should stay around this level.



  • We sold half our USD overweight exposure. Although we expect the EURUSD exchange rate to stabilise, we recognise key resistance levels have been broken.
  • We benefited from oil-price rebound thanks to our exposure to the NOK.