A robust US economy, continued reflationary momentum in Japan, and a lower level of energy prices should, on balance, sustain gains in equities and improve prospects for some fixed income categories in coming months. We have thus decided to shift our tactical overweight in equities in favor of the US and Japan, and invest a portion of our elevated cash position mainly in emerging market bonds. We remain overweight the US dollar and the British pound.
Of the larger economies, the US is now the only stronghold of growth, while the Eurozone is flirting with another recession, Japan’s path to a recovery remains gradual, and China’s growth continues to soften. In sum, however, our base scenario of moderate, inflation-free global growth remains in place. The most probable risk scenario for the next couple of quarters is that disinflationary pressures prevail, and monetary countermeasures prove ineffective.
Obviously, this risk is most pronounced in the Eurozone, where it all seems to hinge on the European Central Bank’s policy decisions in early 2015. We remain only cautiously optimistic in this regard.
In the US, strong labor market data and tentative signs of wage inflation will probably leave the Federal Reserve bereft of excuses not to raise interest rates next year, and the US economy looks robust enough to weather this. However, the Fed is more likely to err on the side of caution, and prefer too little over too much tightening of monetary conditions, which should nonetheless remain very supportive.
The recent collapse in crude oil prices, on balance, creates tailwinds for most developed economies as it reduces energy import bills and thus supports discretionary consumer spending. However, should it drop much further from here, it could well stifle the flourishing US shale gas & oil sector, with negative consequences for related capital investment and jobs. While this is an issue to stay alert on, we do at present expect oil prices to stabilize in coming months.
The current bull market is now in its sixth year, and thus already older than the average (which is closer to four years). That alone, however, is not a reason to call the quits. We believe that there is still abundant liquidity on the sidelines, waiting to be invested in equities. Investor bullishness is still not at extreme levels, and, apart from certain segments, valuations are still acceptable in most cases. The US stock market continues to demonstrate steady upward momentum, supported by robust and underestimated earnings growth, and a benign macroeconomic policy backdrop. It thus continues to offer a more convincing investment case compared to other regions, and we decided to further increase our overweight exposure in that market.
The same is true for Japanese equities, which remain our most pronounced conviction overweight (on a currency-hedged basis). This weekend’s general election confirmed broader political support for “Abenomics”, which entail further asset reflation, growth-friendly reforms, and currency depreciation. Thus, we decided to add to our overweight exposure in Japan as well.
A number of strategists are recommending shifting funds from the US and into European equities, based on relative valuation met-rics, and hopes that the ECB will launch a US-style quantitative easing program early next year. We are less convinced with respect to the latter, and prefer to keep our European equity positioning at neutral. Furthermore, we reduce our position in Asia-Pacific equities, which failed to regain relative strength in recent months. Reliance on commodities hurts Australia, while the weak yen, at least in the short term, weighs on Japan’s regional export-reliant competitors.
Read about the resulting investment positioning changes in our portfolios in the "LGT Beacon" below. To subscribe to a weekly newsletter, click on "Abo". Note: The next LGT Beacon will be published on 14 January 2015.