Please find below the notes from GAM Investments' Weekly Investment Meeting on 16 May 2018 – this week’s speaker was Larry Hatheway, commentating on the fact markets are currently struggling to find a direction.
We are in a slow period in terms of macro data. As the Q1 earnings season in the US draws to a close, the market will also struggle to find direction based on bottom-up data. The European earnings season still has more companies to report. Thus far, however, European earnings have failed to drive equity indices higher, partly because earnings were held back by Q1 euro strength and a soft patch of growth. The focus remains therefore on financials, which are one of the biggest swing factors in the European reporting season.
Meanwhile the US dollar is recovering on global foreign exchange markets. Among other things, this is dragging down performance of emerging local currency debt markets, a move exacerbated by investor positioning.
Venezuelan oil production is slumping. That is another reason, alongside the risk of renewed US sanctions against Iran, that oil prices remain elevated. The combination of high oil prices and weakness of the euro and yen, should it persist, could eventually put upward pressure on headline inflation in Europe and Japan. That possibility merits watching, as it could impact expectations for monetary policy later this year.
For equities, rising bond yields and a resurgent dollar may also begin to change returns. Typically, value and financials perform better as yield curves steepen, for instance. Rate-sensitive sectors, including utilities, staples and REITs, tend to underperform. In markets which are otherwise struggling to find direction, sector and style management can become a more important driver of performance.
You can read Larry’s latest macroeconomic asset allocation views here.
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