Risky assets have rallied further, reversing much of late-2018’s market sell-off. Recession fears have receded and the Federal Reserve’s (Fed) new dovish tone has shored up investor confidence. The recent oil price rebound has helped ease financial conditions via lower corporate bond yields. Apart from the US, global macro data has been underwhelming while the trade war has begun to dent manufacturing activity. However, investors have shrugged off these factors, pinning their hopes instead on a trade agreement between the US and China and a soft Brexit scenario.
Back to reality!
Despite this investor optimism, global growth is decelerating. All three main economies – the US, China and the eurozone – are expected to print lower data in 2019. Growth in China will be key given its impact on emerging economies as well as on European and US exporters. Analyst expectations for earnings growth in the eurozone still look to optimistic in our view. Nonetheless, we still expect positive earnings growth this year in all three economies.
Riding the momentum
We continue to recommend a neutral position on global equities as central banks seem willing to support credit and growth against a backdrop of tame inflation. The Fed’s shift to a neutral stance clearly supports risk appetite – it now looks likely that its planned hikes will be delayed (perhaps cancelled?) and it might even halt the shrinkage in its asset holdings. For now, only a pick-up in US inflation could make the Fed turn more hawkish again. The European Central Bank (ECB) has hinted at new funding measures to help eurozone banks on the back of the current dip in activity and signs of weaker bank lending. However, we remain concerned that the effects of the trade war will linger whatever the outcome of US-China negotiations.
We remain selective on risky assets with a preference for corporate credit and equities, while keeping low exposure to sovereign bonds where valuations are more stretched.
In accordance with the applicable regulation, we inform the reader that this material is qualified as a marketing document. CA010/FEB/2019