Weekly View – Flextension?

The CIO office’s view of the week ahead.

Risk assets were positive across the board last week, with volatility falling back into low territory. The rally was driven by encouraging signs from the world’s two biggest economies. In China, a turn in economic indicators has started to show through with manufacturing purchasing manager indices (PMI) moving back into expansion territory in March. At the same time, the US has returned to a ‘Goldilocks’ environment, with Friday’s solid employment report boding well for continued growth, while inflation remains absent and the Federal Reserve dovish. German Bund yields have also rebounded. We maintain our short duration call in European bonds.

Later this week will kick off the Q1 reporting season and we will be looking for the stabilisation of earnings revisions as well as how companies talk about the outlook for markets this year to direct our outlook for the continued ascent of equities. Equity valuations are looking increasingly close to fair value, especially in the US, possibly limiting further upward valuation potential. This puts more emphasis on earnings growth, which is still expected to land in the low single digits in the US for 2019, at around 3%. At this point, the only market that is starting to experience significant positive breadth (more upgrades than downgrades) is China and we remain positive on Asian equities.

Political interference in markets shows no signs of letting up. In the UK, Theresa May will seek an extension to the current (already extended) 12 April deadline to the end of June, as European leaders gather at the EU Council summit on 10 April. EU Council President Donald Tusk has signalled his openness to a longer, one-year flexible extension, while countries like France stand reluctant to acquiesce unless the UK shows more clarity in how it will use the extra time. While a no-deal Brexit is not our core scenario, we have added some protection in European equities as a precaution. Meanwhile in the US, Donald Trump has called for rate cuts and the continuation of quantitative easing, while at the same time, his latest nominees for the Federal Reserve are staunch political allies, posing risk to the central bank’s independence. Equity markets are potentially overcomplacent.

César Pérez Ruiz, Head of Investments & CIO

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