23 JUL


Asset Allocation , Topics

The upcoming expansion is the second step of global reflation after the recovery in 2016.

Executive Summary

  • The upcoming expansion is the second step of global reflation after the recovery in 2016. As expected, central banks are now at the forefront.
  • The key question for the coming months is the resilience of equity markets to this tightening bias.
  • We are constructive on equities and have increased our exposure to Japan.

Main convictions

  • The global expansion dynamic is well underway.

In the US, cyclical expansion hit a soft patch, leading to our neutral stance on US equities, while recent data confirmed that the European recovery is well on track and leading to above-trend growth in 2017-18. As a result, we increased our earnings expectations for Eurozone equities, one of our strongest convictions. We agree with Mario Draghi that deflationary forces, registered until last year, are no longer present, though global inflation momentum is only rising gradually. Meanwhile, protectionism fears have decreased (China, NAFTA), but have not completely disappeared, as demonstrated by the G20 summit. Against this backdrop, we are slightly overweight on equities and have strong regional convictions, favouring an allocation to EMU, Japanese and emerging market equities, while keeping a short duration bias.

  • Political risk has shifted from Europe to the US.

We think that we are past the peak of EMU policy uncertainty following the elections in France, with Italian risk looking manageable on a medium-term horizon and already priced-in by markets. In the US, lack of progress on healthcare reform in Congress has called tax reform plans in question, a cornerstone for the credibility of the Trump presidency. Slippage in the timing of the fiscal stimulus continues to be a source of uncertainty. We are waiting for more clarity to become more constructive: domestically, on US reflation through fiscal stimulus, tax cuts and regulatory easing; internationally, on geopolitical tensions with Syria, Iran and North Korea.

  • Central bank dovishness to recede gradually.

We expect another Fed hike later this year, which is not priced in by the market. The next step in the Fed tightening process will be through balance sheet reduction, the timing of which is uncertain but is likely in September. Similarly, ECB tapering announcements have become a central theme after Mario Draghi’s latest speeches, in line with economic robustness in the region. Tightening there is at odds with a highly accommodative Bank of Japan (BoJ) and monetary policy easing in emerging markets, including Brazil.



Tactical and regional portfolio positioning

GENERAL OVERVIEW: Equities vs. Bonds

The global economic environment remains supportive for equities versus bonds from a medium-term perspective. The expansion continues and the Eurozone has clearly taken the lead with robust and improving economic indicators. The soft patch, observed since February/March in the US, appeared to come to an end as the first half drew to close. Central bankers around the world -with the notable exception of the BoJ - have acknowledged that economic news is firming. This can also be seen in the turnaround in economic surprises for the US, a mean-reverting series by construction, which bottomed out at the end of June. We expect the upcoming expansion to be the second step in global reflation, which started last year with a global recovery. In the meantime, central bank dovishness is gradually receding.

The key question for the coming months is the resilience of equity markets to the –gradual– tightening bias. Uncertainty about how much inflation will respond to tightening labour and goods markets favours this gradual approach. Since the equity rotation is following bond market signals, we increased our exposure to Japanese equities, further expanding our exposure to an investment theme geared to the cycle and benefiting from an ultra-accommodative central bank.


Slightly overweight on equities

  • Economic newsflow is starting to become more supportive again in the US.
  • We have a neutral stance on US equities. US stock markets have benefited from post-election optimism among consumers and businesses, but activity has been in a soft patch. Now, economic newsflow is starting to become more supportive again in the US. Economic surprises have started to recover from extreme negative levels. Even so, we still see some execution risk in the announced fiscal stimulus and will closely follow updates from lawmakers. Failure on the healthcare reform would not be helpful in restoring confidence

  • Economic newsflow is starting to become more supportive again in the US.
  • We are positive on EMU equities. An on-going, more robust and geographically broadening economic expansion, an accommodative central bank and strong corporate earnings momentum underpin the attractiveness of the region’s risk assets. The sharp decline in the political risk premium and recent bank rescues are restoring confidence.
  • We are negative on Europe ex-EMU equities. Given the outcome of the snap election and uncertainties surrounding Brexit conditions and their impact on the economy, we are avoiding the region. While the bulk of the exchange rate adjustment might be behind us, we expect earnings growth expectations to soften somewhat
  • We have a positive view on Emerging market equities. They benefit from attractive valuations in a robust global growth environment. China should not trigger a systemic risk this year, and most recent data (foreign reserves, retail sales, industrial output, loans) are all rather supportive. We are monitoring the size of IT/Tech exposure, contributing more than 50% to H1 returns.
  • We have an overweight stance on Japanese equities. Strengthening global growth and a supportive domestic policy mix are among the main performance drivers. We are now even more certain 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, key risks going forward are (geo)political.


Negative on government bonds, short duration

  • With a tightening Fed and inflation pressures on the horizon, we expect rates and bond yields to resume an uptrend from June’s low. We expect rising wages and potential stimulus to push inflation higher, although it is 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 recede, and the ECB should start detailing the next step in its tapering programme in H2.
  • 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 on-going monetary easing movement represents a big source of support; this is our preferred fixed income thematic.



  • US oil production is recovering, whereas global production remains high. As a result, the price of oil (Brent) is struggling to top the USD50/bbl threshold. Technically speaking, USD44 and USD42 represent important support levels.