With a little help from policy makers

Post rally, equity allocation trimmed to underweight

Key points

• Changes to our asset allocation: After the recent stock market rally, we suggest taking profits and aligning tactical and long-term recommendation to underweight for equities. Earnings momentum remains dire, valuations have only marginally improved, but markets are no longer oversold.

• We confirm our overweight in credit due to a) ECB purchases to the tune of €5bn per month and b) valuation, which remains appealing as far as the US is concerned. We affirm our neutral weighting for sovereign debt with a preference for euro periphery.

• Latest survey evidence corroborates our lower global growth forecasts, introduced last month. The G20 finance ministers meeting warned of further “downward growth revisions” and urged a variety of policy measures to arrest any further slowdown.

• Global policy reaction has been more positive: A combination of fiscal and monetary policy is expected to cushion the slowdown in China. In the euro area the ECB announced a significant package of measures, particularly in accelerating the pace of QE by €20bn per month to €80bn.

• This has helped a more favourable sentiment to emerge in financial markets, unwinding much of the tightening in financial conditions witnessed at the start of the year.

• In turn, this increases the likelihood of Fed monetary tightening and we raise our forecast to two Fed hikes this year.