Multi-asset investments views - May 2019 - Almost priced for perfection
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Risky assets continue to rally with equity markets moving to fresh year-to-date highs. As a result the MSCI World is now only 2% below its all-time record. However not all markets are sending the same message.Equity markets implicitly discount a significant cyclical improvement, giving the impression that global growth is once again accelerating, whilst others like government bonds seem to still carry a risk premium that imply a further growth slowdown.
Indeed, the most recent strength of equity markets was primarily driven by improvements in Chinese economic data. True, monetary and credit data, which are forward-looking indicators, surprised on the upside while the broad based PMI recovery hints at economic stabilization. This was confirmed by a rebound in March activity data, defying expectations of a continued growth slowdown. Equities are discounting that this should boost economic activity in the rest of the world sooner rather than later, particularly in Europe.
However, we are of the view that the recovery of the global cycle of output and trade is unlikely to be confirmed before this summer. Firstly, the situation remains particularly difficult in Europe.April PMIs provide no evidence that the growth weakness is about to end.Softness appears the most severe in Germany’s manufacturing sector but is nonetheless wide-spread across the region.
Secondly, green-shoots in China are currently the best hope for a Eurozone manufacturing rebound.However, there is usually a lag of 6-months between turn-arounds in China and turn-arounds in the European manufacturing sector. In the meantime, EU exporters may have to contend with additional risks such as rising oil prices and potentially US tariffs on car exports.
Thirdly, the US economy, which was the last to feel the effect of the global slowdown, should continue to decelerate as the positive impact of the Trump Tax give-away fades.
Equity markets valuations are now back above their long-term average in a context where things may get worse before they get better. We therefore prefer to maintain our current neutral position on equities and to move to an overweight on Fixed Income where we favor carry trades in High Yield credit and EM debt.
Economic momentum and equity prices continue to diverge
Source: Bloomberg, AXA IM
Our key convictions:
· Positive on emerging markets assets, both debt and equities as a more dovish Fed, a peaking US dollar and cheaper valuations are supportive
· We maintain Euro core government bonds at neutral as a lower growth and falling inflation should cap bond yields
· We remain prudent on US and EMU equities given valuation levels and lower expected earnings growth
· Overweight EM equities relative to EMU and US equities
· Positive EM debt and short duration High Yield
· Positive GBP versus EUR and positive NOK versus AUD and CHF
· Long equity call options delta hedged to protect the portfolios
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