Weekly View – Cautious steps forward
The CIO office’s view of the week ahead.
Good news came from the world’s second-largest economy after China’s manufacturing sector resumed growth in March, following three consecutive months of contraction. Employment in the sector also grew and new export orders even managed to move back into expansion territory, despite continued uncertainty around the outcome of trade talks between China and the US. We read these indicators as encouraging signs that the Chinese government’s fiscal stimulus is starting to bear fruit, which is good news for the global economy, especially emerging markets.
The week ahead will be an eventful one on both sides of the Atlantic. In the US, the latest manufacturing and jobs data will be released, providing more colour as to the health of the US economy. Despite the recent yield curve inversion, last week brought some grounds for optimism about the near-term solidity of the US business cycle, with a rebound in corporate profits in Q4 2018 and a sharp improvement in initial jobless claims, signs that the labour market remains robust. With Q1 reporting season soon upon us, we expect downward earnings revisions to taper out, although year-on-year comparisons will be tough, given last year’s Q1 earnings were boosted by the Trump tax cuts. We are urging caution, given the increasingly rich equity valuations following the rally since the start of the year, and have bought put options on European large cap and US small cap equities in portfolios.
Meanwhile, grounds for optimism are considerably more shaky in the UK, as the new 12 April Brexit deadline looms ever closer, with still no clarity on what that day will bring. The UK parliament will hold a new round of ‘indicative votes’ on alternative options to the Prime Minister’s unpopular divorce deal, which she is considering presenting to members of parliament for a fourth vote in the same week. Our base case remains for a long extension and a softer Brexit, although the risks of no deal remain too high for comfort or complacency.
Alexandre Tavazzi, Head of CIO Office & Global Strategist