Key points:

  • Global equity markets edged down in June. The sharp rotation from cyclical sectors into defensives reflects the recent deterioration in investor risk appetite.
  • Earnings should remain the key support for performance going forward. The second quarter earnings outlook for the US and emerging markets remains robust with earnings growth expected to come in at 17.6% and 21.9%, respectively.
  • Although we think it is still too early to turn bearish on equities, we have become more cautious. We have reduced our equity overweight, and prefer US equities given the various risks that have emerged.

Rotation from cyclicals to defensives as risk appetite drops

Global equity markets were down 1.3% over the previous month, with defensive markets like the US (-0.3%) and Switzerland (1.8%) outperforming the benchmark in local currency terms. High beta markets like Japan (-4.9%) and emerging markets (-5.5%) fared poorly. A sharp reversal from cyclical sectors into defensive ones was observed in line with a deterioration in investor risk appetite. Sectors like utilities (5.1%), consumer staples (3.1%) and telecoms (1.5%) benefited from the rotation trade, while industrial (-4.1%), technology (-3.3%) and financial (-2.7%) names lagged. The energy sector continues to be well supported by buoyant oil prices. There was little difference in terms of performance between broader value and growth styles.


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