Weekly View – Easing spreads
The CIO Office's view of the week ahead.
When the Apollo 11 mission landed on the moon 50 years ago, the 13-minute descent was “rampant with unknowns”, according to Neil Armstrong. Today, central bankers are on their own outer space mission, navigating unchartered monetary policy territory. As they wait for interest rates to land, investors await terra firma in markets. The dovishness that swept across all major central banks is now spreading to emerging markets (EM). Last week, the central banks of India, South Korea, South Africa and Indonesia all eased monetary policy, while those of Brazil, Turkey and Russia have set strong expectations that they will follow suit. This echoing of the Federal Reserve’s (Fed) easing is a positive for our positions in EM local currency debt, which performed very strongly last week. We continue to remain underweight EM equities as we wait for growth and earnings expectations to pick up.
Confirming that China’s momentum weakened after a strong Q1, Chinese Q2 GDP growth was the lowest in 20 years. More assuring, nominal growth has started to pick up and the June indicators for H2 show a stabilisation in consumption. We expect the Chinese authorities to implement new measures that will stabilise growth without producing a strong rebound, and thus keep our 2019 Chinese GDP growth forecast at 6.3%.
In developed markets, around 16% of US large caps have reported Q2 results so far. Banks have delivered solid numbers, while the rest of the market has been a mixed bag. It will take a high degree of upside surprises for price appreciation to follow, but only a small amount of disappointment for equity prices to fall, so the outlook is asymmetric. In the absence of support from rising estimates to justify a significant move higher in equity markets, central banks will continue to be relied on to support valuations. With heightened political risk around the Tory leadership vote, this week’s European Central Bank (ECB) meeting and the Fed’s after that will be key for markets. In this environment, we remain cautious on equities and look for better opportunities.
Alexandre Tavazzi, Head of CIO Office and Global Strategist at Pictet Wealth Management