Asset allocation – February 2018
SUMMARY: Global equities sold off aggressively as higher bond yields finally dented the strong January risk rally / The sell-off was triggered by strong hourly earnings data in the US, but its magnitude appears to be exacerbated by market technicals / Solid growth fundamentals and limited contagion from the equity volatility to other markets such as rates, currencies and emerging markets (EM) are consistent with a technical dislocation in markets
Asset allocation - February 2018
Central banks induce regime shifts
So far so good, but markets underestimate risks
SUMMARY: US equities continued to outperform other markets such as EMU and EM equities. This partly reflects the divergence between the US economy -which is supported by fiscal expansion and a patient Federal Reserve- and relatively weaker growth in the eurozone and EM. But there is more to this divergence than faster US economic growth. The US equity rally has been led by the IT sector. This has accounted for 20%-50% of US equity returns since 2016. The rally is now looking stretched on various metrics. The other salient development in August was renewed stress in emerging markets (EM). A combination of economic stress in Turkey, weaker growth in China, Sino-US trade tensions and a stronger US dollar hurt EM assets. We believe there is value in EM assets, but the obvious circuit-breakers are still absent: a weaker USD, aggressive China stimulus and fresh Sino-US trade talks. EM assets prospects have soured and protectionism and tighter liquidity continue to cloud their longer-term prospects.