Our June Global Investment Views are available!
Equities and commodities such as gold touched historical highs in May. The stocks rally broadened to Europe, the UK and China after the Fed paved the way for a dovish environment. In line US inflation also boosted sentiment. On the other hand, corporate earnings proved better than expected in the US and Europe. Looking ahead, central banks, the inflation/growth mix, earnings strength and geopolitical risks will shape the global economy and markets:
- Outlook marginally improving.?We upgrade this year’s economic growth expectations for the Eurozone and the UK due to domestic demand and slowing inflation. The US should remain resilient in the first half, but slowing wage growth and consumer delinquencies may weigh on the economy later.
- ?Temporary decoupling of the Fed with Europe.?The disinflationary?process in Europe and the UK will allow central banks to reduce rates,?possibly ahead of the Fed. US inflation readings are crucial for the Fed to decide on the timing of the first rate cut. We expect 75bps of cuts this year.
- ?US-China geopolitical rivalry calls for a strategic rethink in Europe.?Europe is unlikely to alienate the US or China completely because of their importance for trade. The region also needs to balance its priorities around fiscal impetus and sustainability, low productivity (vs. the US) and investments related to the green transition that may fill the fiscal lag.
- ?Mixed picture for China.?Temporary relief measures to boost the real?estate sector do not address the main issue of weak demand. But exports?have been encouraging, leading us to be vigilant on these two factors.
Markets are likely to remain range bound, with possible episodes of volatility if inflation accelerates or geopolitical risks escalate. We outline below our main convictions across asset classes:
- The confirmation of a late-cycle environment leads us to stay mildly positive on equities, with some regional adjustments.?In developed markets, we move to neutral from positive on Japan and we see scope for rebalancing in favour of the UK, European small caps and the US. While the US is displaying strong earnings, Europe should benefit from the moderately resilient economic environment and rate cuts. In government bonds, we are positive on the US and core Europe, along with Italy. In credit, valuations in Euro investment grade are attractive. We also look for selective opportunities across emerging markets and see oil as providing protection from geopolitical risks.
- ?In fixed income,?subsiding US inflation enables us to keep our constructive and active view on US Treasuries. While we are positive on UK government bonds, we remain neutral on Europe and cautious on Japan. Credit markets were very receptive to the new issues this year in the US, thanks to the attractive yields on offer before the Fed starts to cut rates. This is a major risk,?if inflation remains sticky, the Fed may be forced to delay cuts which could impact the stability of low-quality companies that have excessive debt. Hence, we favour investment grade over high yield, both in Europe and the US.
- ?We notice rotation opportunities in equities towards segments that show earnings strength and attractive?valuations. Thus, we avoid the expensive growth names and US megacaps. Instead, we prefer equal-weighted indices and do not shy away from going down the market capitalisation spectrum in search of quality. Sector wise, we like banks and are exploring the energy sector. In Europe, we maintain a balanced stance through defensive and cyclical names. Our overall tilt towards value and quality stocks remains in place.
- ?EM bonds offer ample opportunities.?We still prefer hard currency to local currency debt and from a regional view we like Latin America and EMEA (Hungary, South Africa) owing to robust carry. Asia is another important source of idiosyncratic opportunities, with countries such as India standing out. Even in equities, we keep a positive stance.
Investment Banking| Executive MBA London Business School
5 个月insightful as always , Thanks Vincent for sharing
Senior Corporate Credit Analyst at Intesa Sanpaolo Bank Romania
5 个月Thank you for sharing!
Chief Investment Officer at People’s Partnership
5 个月Neat summary thanks !
Leading expert in Asset Management, Financial Economics and Geopolitics, I write my personal thoughts
5 个月Vincent Mortier thanks for your insightful thoughts. "Looking ahead, central banks, the inflation/growth mix, earnings strength and geopolitical risks will shape the global economy and markets". In particular I emphasize that China has accused the EU of working to 'suppress' Chinese companies and said it will take action to safeguard its interests as the bloc moves closer to imposing tariffs on Chinese electric vehicles. Awaiting the countermeasures threatened by Beijing, there remains the huge trade deficit that favours Chinese companies, which are increasingly close to the dictates of the CCP that finances and directs them, including in the development of dual-use capabilities and products, civil and military, since the China 2025 plan. www.alessandropozzi.it