Riding down a bumpier road

Thought of the day

by Chief Investment Office 18 Jul 2019

Global equities declined 0.5% on Thursday, as investors digested a weak start to the second quarter earnings season and reports that US-China trade talks were at an impasse. Japanese export data added to pessimism, with the seventh consecutive monthly decline, and a 10% y/y fall in shipments to China in June. Facing similar pressures from US-China trade tensions, South Korea’s central bank cut its policy rates by 25 basis points, earlier than consensus expectations.

But while we would want to see a pick-up in fundamentals before adding significantly to equity exposure, the news does not support a retreat from risk assets.

  • US-China trade truce looks likely to hold: The latest stalemate is said to center on tech giant Huawei, with China seeking an easing of restrictions. This is nothing new in substance, as the re-emergence of the Huawei fault line is consistent with our trade base case. We continue to predict a prolonged and at times prickly truce, with both sides eager to avoid a renewed escalation that could unsettle global markets.
  • More central bank support is likely: Both South Korea and Indonesia cut policy rates on Thursday, front running anticipated policy easing from the Fed this month (50bps expected in July) and the ECB later this year (20bps expected in 2H). We think China is likely to continue with more policy easing measures in 2H19 to cushion its economy, too. Central bank easing is providing support for equity markets. It also increases the appeal of carry, in our view.
  • An earnings recession looks unlikely: A number of big names have printed weak numbers for Q2. We think bumpy corporate result shouldn’t be surprising, given the impact of tariffs on investment, sentiment and costs. We expect aggregate 2Q S&P 500 EPS growth to be similar to 1Q, with earnings up 1%–2% versus a year ago.

So we balance our overweight to equities over our six- to 12-month tactical time horizon with countercyclical positions. We are overweight US stocks, which are better placed than Eurozone equities in this environment of heightened risk and growth uncertainty.

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