December 3, 2018

G-20 outcome infuses optimism short term only. Still rather cautious 2019

Highlights:

The agreement on a temporary ceasefire in the China-US trade dispute offers some optimism in the short term.
Global equities should prolong the optimism started after the Powell speech which revealed a more dovish Fed tone. This adds to the recent reduced tensions between the EU commission and the Italian government and the continuing dovish stance by the ECB.
Furthermore, valuations in some risky areas continue to be near extremely low levels versus history: Italian equities, EU Autos, EM and EU Banks.
The euro area (EA) PE reflects already the growth deterioration achieved so far and the German economy could experience some rebound in Q4, thus contributing to sustaining sentiment.
Thus we think the market could have the rebound we expected since some time (too early).
That said, decreasing monetary stimulus, a deterioration of growth/inflation mix, credit tensions along with political and trade risks keep us from exploiting full OW.
2019 will be a difficult year due to peaking US GDP and NIPA profits’ momentum, higher US yields, credit spreads and inflation, which will continue to put pressure on PEs.
Uncertainties related to EU elections and trade frictions and a stronger TW euro will add to negatives. Thus, we keep a cautious view for the next year, waiting for markets to fully digest changing monetary and credit environment: we would light positions again after the rebound.