We have entered into a regime of diminished returns. Sensitivity to news flow is, and will continue to be, very high, as markets try to adjust to new financial and economic conditions. Italian political is triggering a risk aversion phase on Euro, peripheral bonds, banks. How should investors navigate this new phase? First, they should be aware of the mid-term scenario, which will be increasingly challenging (ie, risk of recession, risk of policy mistakes) while playing three major short-term themes. First, the economic outlook is still sound, but with the peak of economic acceleration, we believe, now behind us. Higher oil prices and protectionist talk support this, but without major disruption, as our central case still sees the oil price remaining stable around current levels and no full-on trade war materialising. World GDP growth is expected to be around 4% in 2018, and slightly below 4% in 2019, but still above potential for major economies. On top of this, the narrative of global synchronised growth is losing momentum, with the US still leading (and likely accelerating) among developed markets, thanks to the extension of the cycle, supported by the fiscal boost. Second, central banks (CB) will continue to drift away from their policies of exceptional easing, even if gradually and at a slow pace, as inflation is not viewed to be a major threat at this point.

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