Global macroeconomic newsflow remains positive

Executive Summary

• Global growth is becoming more synchronised. Economic indicators are clearly in uptrend mode, with the exception of the UK.
• Central bank stimulus is still significant except in the US, where the Fed is expected to pursue its tightening monetary policy.
• We are keeping our cautious positioning in UK equities and adding a short position on the GBP against the EUR, as we believe the negative Brexit impact is not yet fully reflected in the exchange rate, after the recent rise in the British pound.
• We are overweight equities via the US, the Eurozone and Japan. We are now neutral on emerging markets: the election of Donald Trump and prospects of a more hawkish Federal Reserve have led to substantial capital outflows from emerging countries.

CROSS-ASSET STRATEGY

United States: stronger US growth

Economic activity remains well oriented, with expected GDP growth of 2.2% in Q4 and a continued expansion of economic activity indicators. Meanwhile, labour market conditions are still improving and wages should accelerate further and support consumption within an economy close to full employment. Given these reassuring metrics, the markets have priced in one Fed interest rate hike in December, two in 2017 and another two in 2018. Moreover, the election of Donald Trump should increase the potential for reflation in the US through fiscal stimulus, tax cuts and regulatory easing. As a result, we have revised upwards our GDP forecasts in the United States to 2.3% in 2017 and 3.3% in 2018.

Euro zone: positive economic sentiment despite political uncertainty

Since November, economic policy uncertainty is on the rise in Europe, led by the UK. Despite the increase in political uncertainty, economic activity remains on track, supported by a weaker euro and improving labour market conditions. Furthermore, the accommodative monetary policy continues to support easier credit conditions both for firms and households. Political risks are, nevertheless, manifold for 2017, with elections scheduled in the Netherlands, France and Germany, and the expected start of the Brexit negotiations.

In this context, we have kept our GDP forecast in the euro area close to 1.5% for 2016 and 2017. 

Central banks are decoupling

The expected policy gap between the US and the rest of the world is likely to increase in the coming months. The Federal Reserve’s tightening cycle is ongoing, while monetary policies in Japan, the Eurozone and the UK remain highly accommodative.

• The FED is expected to announce a second rate hike of 25bps at its December 14^th meeting, and markets also forecast two rate hikes in 2017 and another 2 in 2018 each.
• The Bank of England remains supportive.
• The Bank of Japan is innovating with yield-curve targeting through unlimited bond-buying.
• The ECB will extend its asset purchase programme beyond March 2017 for nine months until the end of December 2017. However, asset purchases will be reduced from €80 billion to €60 billion starting from April.

Japan to benefit from regime change in the US

The country is benefiting from a realignment of its policy mix: accommodative fiscal policy is now in line with monetary policy.

•  As the measures taken in the US on reflation policy have been successful, similar measures taken in Japan should have the same effect.
• Inflation measures are showing early signs of bottoming out and might now be supported by a recovery in crude oil prices, a weaker yen and stronger wage growth.
• Japanese equities offer a hedge against a stronger USD.
• Although, in relative terms, Japanese equities have never been so profitable, this is not yet reflected in the relative valuation.
• The BoJ should, however, face little pressure to lower rates further against the backdrop of a weakening yen and rising global yields.

Cross-asset: slightly overweight on equities

Over the past month, investor positioning has strongly shifted from bonds (mainly US) to equities. In terms of asset allocation, risk appears to have switched from equities to bonds as the prospect of a US recession in 2017 has sharply diminished. As a result, we believe there is further room for an outperformance of equities. However, we remain cautious, due to the uncertain political environment, and have thus  maintained our slight overweight in equities.

REGIONAL EQUITY STRATEGY

Constructive on US and Japanese equities

We expect stronger growth and a rise in corporate earnings following the prospect of post-election reflationary policies and consolidating oil prices. Also, the US tends to outperform in periods of market uncertainty. As detailed above, Japanese equities are benefiting from a weaker yen, a supportive domestic policy mix and relatively attractive valuations.

Slightly overweight on euro-zone equities and negative on the UK

We still believe in the possible re-rating of euro-zone equities, driven by  an attractive valuation, an increase in corporate profits and positive investors’ sentiment, despite the political uncertainty. Meanwhile, we remain negative on UK equities:

• The UK government acknowledged the strongly negative impact of Brexit on revenues. Plus, deterioration in domestic UK macro indicators should hit the FTSE 250, with its significant domestic exposure. In particular, we are avoiding domestically oriented small- and mid-caps.
• The relative valuation is rather expensive, as earnings have dropped in recent years.

Relative to the US, Euro equity performance is lagging the economic newsflow.

• Earnings growth should benefit from a weaker GBP and stabler commodity prices. 

Neutral on Emerging markets

Meanwhile, India remains our preferred emerging market thanks to:Despite the fact that emerging markets are still attractive, they are currently our lowest conviction. The economic momentum is improving, earnings are expected to grow and valuations are appealing, but possible protectionist measures from the newly elected US administration may impact the region’s relative performance. In addition, USD strength represents a drawback.

• Improving fundamentals, with 7.8% GDP growth expected this year and next, and inflation under control.
• An improving current account, which makes India less vulnerable to external influences – a major theme since Donald Trump’s election and his possible protectionist measures.
• Positive domestic agenda in the long run despite the country being currently penalised by bank note issues.