A decent earnings season in the US, Japan and Europe and continuing solid macroeconomic data have resulted in another upward path for the stock markets, giving positive returns to their investors.
As markets are trading at all-time highs and going into the final weeks of 2017, we are eagerly looking for a trigger which could disrupt markets from their current bullish mode. Investors are now largely positioned for above-trend growth coupled with below-trend inflation. As for inflation, we think it is not dead but rather hibernating. Clearly, as financial risks are broadly in check, we think that the consensus market perception is too benign on the global bond yield outlook in spite of relatively clear central banks’ guidance. In particular, the Fed and the BoE have indicated their ability to pursue interest rate hikes in 2018. Those recent announcements have validated our view of a temporary USD appreciation, adding a tailwind for both regions’ equities into the end of the year.
Tensions in the Middle East between Saudi Arabia and Iran have accelerated the rise in the price of oil, up by 20% in just two months.
Our current investment strategy on traditional funds:
grey : no change
blue : change
EQUITIES VERSUS BONDS
We are positive on equities and remain negative on bonds, maintaining a short duration:
- Global economic momentum is accelerating further with economic news-flows surprising on the upside, adding to the ongoing good earnings season. However, geopolitical risks remain an obstacle with increasingly tense relations between North Korea and the US as well as in the Middle East, between Saudi Arabia and Iran.
- We concentrate our portfolio’s regional positioning on the euro zone, Japan and the Emerging markets. While we are positive on Japan, we suspect that Emerging Markets could face some headwinds if the USD strengthens.
- Central bank divergence becomes more obvious:
- The Fed has started its balance sheet reduction and forecasts another rate hike in December.
- Although, the ECB has announced that it would start its balance sheet reduction next January, asset purchases will continue for at least 3 quarters in 2018 and interest rates increases should not happen before the second semester of 2019.
- Equities have an attractive relative valuation compared to credit.
REGIONAL EQUITY STRATEGY
- We remain positive on euro zone equities which are supported by a strong economic and earnings momentum and relatively attractive valuations. The recent decline of the EUR/USD provides additional support, confirmed by the latest earnings reports, which were in line with analysts’ targets.
- We have kept a neutral tactical stance on emerging markets equities, as a result of the USD stabilisation and technical indicators.
- We remain negative on UK 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 overseas profits realised by UK corporates.
- We remain neutral on US equities. There is an execution risk in the announced fiscal stimulus and pro-growth policies. We note that the House and the Senate Budget Committees both approved versions of the FY 2018 budget that included general directions to act on tax reform.
- We are positive on Japanese equities. A strengthening growth and a supportive domestic policy mix are among the main performance drivers and we have gained more conviction that the Bank of Japan will not join other central banks in tightening its monetary policy anytime soon, which should ultimately lead to a weaker JPY. Furthermore, Japanese earnings remain positive so far without depreciation of the JPY.
- We are negative on bonds and have a low duration. The improvement in the European economy could also lead EMU yields higher.
- With a tightening Fed and expected upcoming inflation pressures, we expect rates and bond yields to continue their uptrend from September’s low.
- We continue to diversify out of low-yielding government bonds:
- We have a neutral view on credit, as spreads have already tightened significantly and a potential increase in bond yields could hurt performance.
- We have a diversification in inflation-linked bonds.
- We keep our diversification to emerging market debt, as the on-going monetary easing represents an important support.
- We are more or less neutral on high yield.