America first… but for how long?
Whether you’re looking at equities, bond yields, currencies or economic strength, it’s the US that’s been leading the charge. Is this likely to continue?
Although the cyclical argument gets more uncomfortable with the progress of time, it helps that our economists have pushed out their estimate of when the next recession will come.
As the S&P 500 reached new highs this quarter (notwithstanding the falls in recent weeks) and interest rates are on the rise, we are sticking with our tactical long position in equities. The cycle is still positive for risk asset, in our view, and earnings remain strong. Although the cyclical argument gets more uncomfortable with the progress of time, it helps that our economists have pushed out their estimate of when the next recession will come. However, indicators such as the fattening of the yield curve (admittedly not a perfect timing indicator) make us increasingly cautious.
Meanwhile, we believe that additional Chinese stimulus is on its way. Erik Lueth, our China guru, went on a research trip to the country last week and policymakers were as clear as they could be in his view that more stimulus is coming.
Lastly, we believe that the risks around a trade war have fallen as the negotiations moved from a multi-lateral conflict (US, Mexico, Europe, Canada, China) to a more bilateral one (predominantly between China and the US), at least for now. This seems enough for markets to reduce its focus on trade wars and to price out a worst-case scenario.
In this quarter’s outlook, we focus on the key question for investors: should you put American equities first? We consider what the US yield curve is saying and whether emerging markets (EM) – led by China – could be about to stage a comeback.