Rising hopes of a US-China trade agreement and a soft Brexit deal continue to lift investor sentiment. The dovish stance recently adopted by major central banks, easier funding conditions, and Chinese stimulus measures are all supportive for equities. However, economic uncertainty remains high, global manufacturing activity is decelerating, and trade growth continues to slow. We maintain a neutral view on global equities.
Stay neutral on eurozone equities
US: “Don’t fight the Federal Reserve (Fed)” The Fed’s change in policy stance helped trigger the sharp rebound in equities from the late-December lows. Meanwhile, constructive US-China trade talks have lifted investor sentiment, even if the terms of any deal are still highly uncertain. The Fed’s pause in monetary policy and easier funding conditions are clear positives for equity markets. However, corporate profit growth will decelerate this year – sales growth is slowing, the impact from last year’s tax cuts is fading and rising wages are eroding historically-high margins. .
Eurozone: a wall of worries Eurozone fiscal policy is being eased and there is talk of new long-term refinancing support for bank lending, two supportive factors for stocks. However, equities are vulnerable to slowing global trade and to a weakening regional economy where manufacturing activity is declining rapidly. In addition, political uncertainty is high, banking sector weakness is a source of concern and trade tensions persist despite the push to reach a US-China agreement. And European car manufacturers would be badly hit if the US were to impose auto tariffs. In this context, earnings-per-share (EPS) should continue to grow at a sluggish pace this year.
Economic uncertainties remain elevated
UK – in the hands of Brexit Large British companies generate a significant share of revenues overseas, making them highly sensitive to the Brexit outcome – a soft deal would strengthen sterling, to the detriment of foreign earnings. The market should remain volatile but appealing valuations and a high dividend yield argue for a sanguine view.
Japan: good fundamentals but cyclical headwinds Despite solid domestic demand, the global slowdown could penalise this cyclical market and profit growth is expected to be lacklustre in coming months. This should outweigh positives from structural reforms, improved corporate governance and profitability, and attractive valuations.
Emerging markets: out of the bargain basement The environment for emerging markets has improved over the past few months as a more dovish Fed and a peaking dollar have eased pressures. Also, most central banks are now less restrictive, currencies have stabilised, and capital inflows are recovering. However, valuations are no longer a bargain and emerging equities remain vulnerable to any disappointment in US-China negotiations.
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