Weekly View – Temporary relief
The CIO office’s view of the week ahead.
Several factors halted the equity sell-off last week. Investors continued to take a jaundiced eye of some corporate guidance, but Q3 earnings growth has finally turned out as good as in previous quarters (around 25% year on year for the S&P 500). The sky has seemed to brighten on other fronts too. Most conspicuously, oil prices have fallen and president Trump has floated the idea that tensions with China might be easing. Investors should probably apply the same scepticism as they have to corporate earnings, but the hint of détente on the trade front proved a catalyst for equities, however fleeting. In truth, the de-rating of stocks had probably gone too far. While earnings growth is set to fall, the decline in price-earnings ratios goes beyond even the most pessimistic assessment of prospects.
Of note too were positive noises from Europe, with Brexit negotiators said to be close to resolving differences over the Northern Ireland border. This gave a useful fillip to European stocks that have suffered from a mixture of disappointing corporate results and slowing economic momentum. But European concerns have not gone away. Disappointing economic and corporate data have appeared just as the European Central Bank winds down its monetary stimulus, Germany enters a period of political transition and the dispute over Italy’s budget plans rolls on, with the European Commission possibly set to launch disciplinary procedures against Rome. In short, in spite of the short-term revival in equities last week, and in spite of booking a profit on some of the put options we had bought, it is too early to give up entirely the portfolio protection we have built up.
Alexandre Tavazzi, Head of CIO Office, Global Strategist