BNP: Halbjahrsausblick

The economic cycle is an important factor in our asset allocation. Not only directly, but also through its effect on monetary policy and earnings. Indeed, developed equities have outperformed emerging equities so far this year. Japan’s equity market has strongly underperformed, although this is also due to disappointment about the failure of the ‘Abenomics’ programme to make progress on structural reforms. At this point, we are neutral in our regional equity allocation. We think emerging equities are favourably valued, but we would want to see more evidence of growth recovering before going overweight. We like European equities now that the economy is improving, we see room for higher margins as sales start to grow and valuations are relatively favourable. But we believe European equities are also the asset class most vulnerable to developments in Ukraine, hence our neutral position.

I think this is already changing. Just look at the Fed. The decision to start tapering caused some unrest, especially in emerging equities and currencies. But the Fed’s game plan is clear: reduce asset purchases gradually, assess the impact on markets and the economy and start hiking rates, most likely towards the end of the second quarter of 2015. With this plan laid out, markets no longer assess every data point in terms of their effect on monetary policy. So, instead of weak data being positive for markets because they could lead to additional stimulus, weak data are now negative and strong data positive. And markets are now actually coping quite well with the Fed’s tapering. Emerging markets were underperforming before the tapering started as GDP and earnings growth weakened.

The Bank of Japan may actually increase its asset purchases later this year to weaken the yen further and push up inflation. This should support equities, which typically gain as the currency falls. Looking at the bigger picture, it is clear that monetary policy is instrumental in holding down bond yields and keeping risk spreads on ‘peripheral’ eurozone government bonds to emerging and corporate bonds contained. This is unlikely to change soon, in my view.

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