24 JUL


Asset Allocation , Topics

Without any further escalation of the on-going trade conflict, equities should perform well, especially in the US and emerging markets


  • Global economic growth is still well-oriented. However, we notice more dispersion between regions and countries.
  • In a context of continuing economic and earnings growth, and without any further escalation of the on-going trade conflict, equities should perform well.
  • Core EU rates have stretched valuations, justifying a short duration.


  • Emerging equities, now integrating a substantial geopolitically related risk premium, should rebound in the coming months and offer an investment opportunity.
  • We have a preference for US and EMU small caps.
  • We maintain an underweight in duration and are negative on Italy.
  • We believe that, with a yield of 6.6%, emerging debt in local currency is an attractive investment.


Economic Scenario

Global markets are experiencing wider dispersion in terms of economic expansion. In the United States, despite a small dip at the start of the year, growth remains solid. There has been a clear turnaround in business investment, while consumption – still the main driver of the economy – is being supported by dynamic job creations. The rebound in retail sales observed in April and May underscored the fleeting nature of the weak Q1 performance. Spending increases voted into the 2018 budget will have a greater impact on growth.

Eurozone growth was also weaker in the first quarter, but there is no reason for it to completely stall. Export orders remain well-oriented. Lending conditions are still favourable and business investment is continuously improving. With oil prices stabilising around USD 75, GDP should increase by 2.2% in 2018, slightly below what was achieved in 2017.

In this environment, the ECB is expected to stop buying bonds by the end of the year and we should expect key ECB interest rates to remain at their present levels at least through the summer of 2019, depending on both domestic and foreign developments.


Growth cycle & Liquidity

Financial markets are ruled by geopolitics, due to the increasing trade-war risks. Both rhetoric and actions are intensifying, as the US has now officially implemented tariffs on USD 34 billion of Chinese goods and targeting a further USD 200 billion. China said it would retaliate, opening the door to further negotiations with Donald Trump that will prove to be a ‘deal-maker’ or a ‘deal-breaker’ in the coming months. Meanwhile, the economic picture remains, in spite of the looming trade-war risk, supportive, especially in the US.

Investors are, meanwhile, counting on a strong earnings season. The upwards revision in US earnings before the start of the earnings season was the second-largest increase in S&P 500 earnings estimates in the last eight years. Consensus expectations are now showing 23% YoY earnings growth, boosted by materials and technology. This time, earnings growth is not coming from tax benefits, but clearly from stronger US growth.

In Europe, expected earnings growth of 7.5% –  negatively impacted by a 3.5% YoY increase in the euro’s effective exchange rate – is expected to be underwhelming.

In this context, and without any further escalation of the on-going trade conflict, equities should perform well, especially in the US and in the emerging markets.