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Global economic growth’s momentum seems to be slowing. Inflation is being taken more seriously in several major emerging markets, with central banks exceeding expectations in their tightening measures.
One should not expect too much from equities in the months ahead, although we do believe risk premiums will be positive on a 12-month horizon. The difference in earnings revisions between cyclical sectors and their defensive counterparts is narrowing. This is another indication that positive surprises are increasingly unlikely as the economic cycle progresses.
Real estate has also been affected by a change in investors’ risk appetite. As with stocks, a sideways trading pattern is likely.
Corporate bonds are not being hurt by the weakening of the economy. We believe there is still room for further spread tightening, given the low default rates and the improving credit quality.
The outlook for commodity prices continues to be good in the long run. In the short term, however, the outlook is being affected by the waning of the social unrest in the Middle East. In addition, manufacturing surveys are likely to decline from historical highs, which might put some further pressure on prices.
Within equities, we favor North America and emerging markets over Europe. Earnings revisions in both regions are better. Furthermore, the US consumer is back and exports will benefit from the dollar’s weakness. In emerging markets, the inflation risks are manageable, given the ongoing monetary tightening and a softening of food prices, while government finances are healthy.
We have a slight preference for cyclical and defensive sectors over financials. For quite some time, earnings developments in cyclical sectors have been more robust than in other sectors. Now, earnings growth rates and earnings revisions have converged. Financials is the sector most vulnerable to a possible eurozone debt restructuring.