Expensive but worth it
The coordinated global pace-up of activity that has been recorded to date in 2017 seems likely to extend through year-end. Recovery is gathering pace in the Eurozone in a reformist environment.
Robust U.S. activity and labor markets could get another booster shot of fiscal reform. Japan is seeing the first signs of reflation. EM countries keep beating macro-economists’ expectations as China’s transition to domestic demand propeller looks on track. Some central banks should take advantage of this window of opportunity to start initiating monetary policy normalization. However, the process should be very progressive, while inflation prints are off-target globally. Expensive risk assets should not be at risk of a major correction as long as growth drivers are taking the relay.
The devastating hurricane season has sown a number of hopeful seeds in the U.S.: a reconstruction bounce back, a bipartisan debt deal and new chances of a fiscal reform. The Fed, for its part, looks ready to stay its course as we think that wage and core inflation are set to recover in the medium-term. Its balance sheet is set to shrink from October onwards and a rate hike is on the table for December. We are slightly underweight on Treasuries. U.S. equity valuations are stretched but strong fundamentals keep our recommendation at neutral.
Oil prices should also trade range-bound as supply and demand balance out. EMs are enjoying the pick-up of global trade triggered by recovering global demand. With China heading to its National Party Congress, little disruption is expected. We remain neutral with regards to EM assets amid the looming U.S. tightening.
Japan could be at the eve of a new dawn as economically stimulating policy and politics are bearing their first fruit. The expected extension of current support has us turn long-term overweight on Nippon stocks.
The light is flashing green in the Eurozone: political risks have turned into opportunities around the Franco-German duo, and full swing cyclical recovery is set to gain impetus from corporations’ investment. The ECB’s tapering should be kept dovish via a slow pace-down through 2018 and low rates beyond. We are slight underweight Bund and overweight EMU risk assets with a preference for equity.
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