Politicians in Italy managed to avert the need for elections, but market attention now returns to the new populist government’s policy program.
The football-loving Italians already have to watch the World Cup next month without “La Squadra Azzurra” playing, and last week a new Italian government was also eliminated from the finals.
Improving and broad-based economic momentum, strong earnings growth and a very gradual path of monetary policy normalisation resulted in strong returns for risky assets.
Equities are our preferred asset class. The fundamental backdrop is the best we have seen in years, with strong macroeconomic data and double-digit earnings growth this and next year.
Our 2018 outlook for equities is positive, thanks to a benign macroeconomic environment and double-digit global earnings growth. Returns will mainly have to come from earnings growth though, as the room for multiple expansion looks limited. Japan is our preferred equity market.
The environment for risky assets is the best in years. Macro fundamentals remain strong, corporate earnings are beating expectations and central banks remain accommodative. We increase the focus on growth by upgrading equities in our asset allocation.
Last week was a good one for all asset classes. German bond yields declined following the European Central Bank’s surprisingly dovish comments, and equities benefitted from an improving earnings outlook, especially in the US and also in Japan. Macroeconomic data were strong and came in above expectations. In the Eurozone, the Spanish government’s takeover of regional powers in Catalonia and the announcement of December elections were positive for Spanish assets, which were under pressure last month after the Catalonian independence referendum. In the US, the appointment of a new Federal Reserve chair signalled a continuance of market-friendly monetary policy.
Markets have continued to perform well amid numerous political risks looming around the world. The global fundamental picture remains a key reason, with economic and earnings growth still strong. Market dynamics are now also providing support.
Energy equities have underperformed this year compared with the price of crude oil, one of the sector’s main profit determinants. We upgraded energy to a small overweight.
Angela Merkel’s CDU has won the German election. Yet, the Social Democrats lost and do not want to form a new coalition with the CDU. Merkel now faces tough coalition negotiations, likely with the liberal FDP and the Greens which differ substantially on many policy issues, amongst others on European integration.