2018 ended in tears, with a collapse in growth and inflation expectations, negative economic surprises and tumbling global equity markets. In a nutshell: the sum of all fears for any investor. Q1 2019, however, has become one of the best quarters in the past decade. Fears were replaced by renewed optimism about an end to central bank hesitations, following the improvement in international trade relations and on nascent signs of a bottoming in the down spiral of macroeconomic data. Is it time to get back in the saddle? Yes! but only with regional bias.
In the US, leading indicators are reassuring. There is increasing probability of an agreement finally being reached on trade relations with China. In terms of equity, while the US market still has upside, valuation has recovered faster and is now less attractive than other regions’ as it is around its historical average. Earnings expectations have been cut to around 3-4% growth and Q1 2019 earnings should be – at best – flat.
In the euro zone, we see potential in:
Although investors got spooked last year and left, the market does not hold grudges and, while political risk is a key hurdle for European assets and the Brexit deadline is yet again blurry, valuation is cheaper and the potential for a catch-up is at hand. As greed can be a good thing when investing, we will favour euro-zone equities over Europe ex-euro zone while staying neutral European equities as a whole.
In Emerging markets, China’s stimulus package to benefit its domestic economy is massive. It is a key driver for the whole region, where there has been a strong improvement in sentiment. The equity market’s valuation is attractive. A dovish Fed is another ace up their sleeve and investors have stayed loyal to the region throughout the turmoil of 2018: investors see potential in the region’s growth, the cheaper valuation and the attractive risk/reward.
We have kept our overall exposure to global equities tactically neutral. However, within that exposure, we are getting back in the saddle via Emerging markets vs the US. We remain in favour of the euro zone vs Europe ex-euro zone. Our exposure to Japanese equities remains the same. Japan is lagging, in terms of performance and improvement in valuation. The region could catch up as soon as the news flow around international relations improves and global growth renews with more traction.
Our fixed income allocation remains stable. We are still underweight duration as we still expect rates to rise moderately – at least in the US. We have diversified our exposure via Emerging market and high-yield debt.
From a strategic point of view, we remain moderately constructive on equities vs. bonds and expects an equity market increase this year and higher year-end targets for German and US yields.
Any improvement to the macroeconomic data, combined with a decrease in political risk, would make us reconsider increasing our exposure to risky assets.