17 APR


After being overweight at the start of the year, we trimmed our equity exposure to neutral at the beginning of March. Growth beyond H1 2018 is expected to remain solid, but we note an increase in downside risks to our central scenario, as the macro momentum is peaking, monetary normalization in the US is accelerating and concerns about protectionism are intensifying. On the other hand, the upcoming earnings season presents some upside risks. Clearly, we are looking for a good entry point during this quarter to increase our equity exposure, once the current noise subsides.

Core scenario

From a macroeconomic point of view, the global context remains supportive of riskier assets in the medium term. The world economy is growing and should expand further, thanks mainly to stronger emerging market growth. US growth is driven by consumption, which is supported by strong job growth and higher household income. In 2018, the global economy should register stronger growth levels than in 2017, whereas 2019 is still expected to show activity levels above potential in many regions. In this context, equity valuations appear attractive, in particular compared to bonds.

Downside risks

The recent escalation in trade war rhetoric poses a risk to our scenario of solid growth and moderate inflation. There has been little top-down impact so far, but an escalation towards a genuine trade conflict would likely bring no winners, just different degrees of losers. We expect uncertainty to prevail until May 22nd, when the public comment process on the proposed US tariffs on Chinese goods ends. Other new geopolitical risks could also emerge, notably in the Middle East. Further, while the median FOMC projection continues to show three hikes for 2018, rate hikes are nevertheless set to accelerate. According to Fed median projections, there is upside risk on market interest rates, which is likely to flatten the US yield curve further.

Upside risks

The Q1 earnings season, which kicks off in earnest this week, is expected to deliver robust results. The upcoming earnings season is crucial, as consensus revisions of S&P 500 EPS since the start of the year have risen by 5%, whereas a typical pre-earnings season represents cuts of 3-4%. The upside risks on Q1 earnings are based on strong cyclical momentum, higher oil prices, a sequentially weaker USD and the proceeds of the tax reform.