As was widely expected, the British Parliament has voted against Prime Minister Theresa May’s transitional deal. The defeat was a catastrophic one for the government, with a total of 202 Members of Parliament voting for the deal and 432 against (amounting to a 230-vote loss). By a significant margin, this constitutes the biggest loss for a sitting government in modern history.
The British Parliament is gearing up for a decisive vote on the Brexit deal on 15 January. If the deal passes, the path will be cleared and markets will stabilise. If the deal fails, market turmoil will continue, with the end result still up in the air.
US to face moderate growth slowdown as stimulus effect wanes; Fed tightening starting to be felt. Growth in Europe and Japan starting to re-converge to US growth; we prefer non-US assets to US. Emerging markets face challenges from trade tariffs and normalising US monetary policy.
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.