Weekly View – Modi makes it

The CIO office’s view of the week ahead.

We are in the midst of a decisive elections season, from the surprise, poll-defying victory of the conservative coalition in Australia and Indian general elections last weekend to the European parliament elections in the week ahead. Exit polls suggest Indian prime minister Narendra Modi and his Bharatiya Janata party are likely to return to power with a parliamentary majority. This was positive for Indian equities, which we retain an overweight exposure to. Meanwhile, EU citizens (Brits included) will head to the voting stations from Thursday. These European elections are expected to be a contest for and against Brexit in the UK and pro-EU versus Eurosceptics elsewhere.

We continue to see signs of a broad global slowdown. In the US, retail sales disappointed in April as US banks start to tighten credit card lending. At the same time, Chinese import and export growth continues to trend downward. Globally, we are seeing economies that are sensitive to manufacturing and world trade suffer as the US-China trade tensions escalate and protract. The manufacturing sector of Germany, Europe’s largest economy, is experiencing an extended weakening trend, but, encouragingly, the German economy moved back into positive growth territory in Q1 on the back of its strong domestic sector.

Meanwhile, geopolitical uncertainties persist in threatening to topple the world economy house of cards. In the UK, risk of a hard Brexit has risen after talks between Theresa May and Labour disintegrated last week. Google will suspend delivery of its software and technical services to the world’s second-largest smartphone maker, Huawei, after the US government added the Chinese tech giant to its list of entities facing export controls for posing “significant risk” to US national security. More worryingly, rhetoric between the US and Iran continues to escalate, with Trump tweeting warnings to Tehran over the weekend. Against this backdrop and recognising that both political and economic risks have increased recently while equity valuations remain high, we have shifted our portfolio exposure to underweight global equities.

César Pérez Ruiz, Head of Investments & CIO

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