Emerging markets hit by a combination of shocks
- A number of idiosyncratic surprises and a rebound in the US dollar have together managed to interrupt the emerging market (EM) rally which started in 2016
- We remain constructive on the asset class as the macroeconomic backdrop in most countries looks solid while assets are attractively priced and the bulk of capital outflows, have hopefully, already taken place
- We do not expect that the problems troubling some developing economies will spur-on an overall EM systemic debacle. The key risk in our view is a stronger than anticipated appreciation of the US dollar
Macro: our positive conviction is unchanged but risks are tilted to the downside
- From a demand perspective, we maintain our view that the Eurozone can keep growing at 2% this year and next. Despite the legacy issues of the prolonged downturn i.e. structurally higher unemployment, labour market slack remains ample
- We will however carefully watch incoming soft and hard data, as several regions (EMU, Japan and some EMs) are facing a month of truth
Asset allocation: Downgrading Eurozone equities
- We maintain our positive view on equities, relative to fixed income and have a short duration bias
- After the strong outperformance of Eurozone equities, we have downgraded the region as macro data continues to disappoint, which is weighing on market sentiment and earnings’ expectations. In addition, political risk has risen in Italy
- The European Central Bank’s surprise announcement to keep interest rates unchanged until at least September 2019 has led us to downgrade our EUR/USD target to 1.20 by end 2018
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