Quarterly Outlook
Q3 Investor Outlook: Beyond American shores – why diversification is your strongest ally
Jacob Falkencrone
Global Head of Investment Strategy
Access all our platforms from a single account.
European small-cap rebound – a good sign or not?
Peter Garnry
Chief Investment Strategist
Summary: When a smaller asset class bucks a trend and unexpectedly outperforms its blue-chip counterparts, should investors hang on for the ride or pocket their profits?
European small caps and emerging market equities were among the worst-performing of all asset classes last year. So far this year the MSCI Europe Small Cap index is up 5.2% compared to only 2.6% for global equities. But is the risk-on sentiment in one of the most risky asset classes a good sign for markets?
Strong sentiment on European equities is a bit puzzling given the uncertainty over economic growth not only in Europe but globally. Today’s industrial production for November in Germany showed a 4.7% y/y decline, the biggest slide since 2009. Before investors panic one should note that this time series is non-seasonally adjusted, so part of the big decline can be explained from the high base.
Germany’s industrial production in November 2017 was up 5.7% y/y. Nevertheless, the macro print is bad and confirms the weakness in Germany’s external sector driven quite a lot by the weakness in China. In other words, it was already priced in. But combining this information with the weak price action among Chinese equities today, especially in auto and smartphone stocks, the picture looks gloomy.
Strong sentiment on European equities is a bit puzzling given the uncertainty over economic growth not only in Europe but globally. Today’s industrial production for November in Germany showed a 4.7% y/y decline, the biggest slide since 2009. Before investors panic one should note that this time series is non-seasonally adjusted, so part of the big decline can be explained from the high base.
Germany’s industrial production in November 2017 was up 5.7% y/y. Nevertheless, the macro print is bad and confirms the weakness in Germany’s external sector driven quite a lot by the weakness in China. In other words, it was already priced in. But combining this information with the weak price action among Chinese equities today, especially in auto and smartphone stocks, the picture looks gloomy.
We maintain our defensive view on equities. That means no more than 25%–30% weight to them in an asset allocation portfolio and the equity exposure should be in factor tilts such as minimum volatility. On a sectoral level, defensive sectors (consumer staples, healthcare, telecom) should be preferred. In other words, take your gains in European small-caps. Our view is that the market is getting a little bit too optimistic here on the Fed and on a big deal between the US and China.
We could obviously be wrong and China may successfully manage to stage a rebound in the economy on top of striking a deal with the US. In this scenario, and given that the Fed keeps its monetary policy looser than expected just one month ago, equities could obviously rally further. But remember even during downturns, brief moments of relief rallies do happen. From late March 2008 to mid-May 2008 the global equity market rallied 10.6% on the rescue of Bear Stearns. The rest is history.
We could obviously be wrong and China may successfully manage to stage a rebound in the economy on top of striking a deal with the US. In this scenario, and given that the Fed keeps its monetary policy looser than expected just one month ago, equities could obviously rally further. But remember even during downturns, brief moments of relief rallies do happen. From late March 2008 to mid-May 2008 the global equity market rallied 10.6% on the rescue of Bear Stearns. The rest is history.
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Q3 Macro Outlook: Less chaos, and hopefully a bit more clarity
John J. Hardy
Global Head of Macro Strategy
After the chaos of Q2, the quarter ahead should get a bit more clarity on how Trump 2.0 is impacting... -
Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
-
Quarterly Outlook
Commodity Outlook: Commodities rally despite global uncertainty
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
Upending the global order at blinding speed
John J. Hardy
Global Head of Macro Strategy
We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ... -
Quarterly Outlook
Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever
Jacob Falkencrone
Global Head of Investment Strategy
-
Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Macro Strategy
-
Quarterly Outlook
Equity Outlook: The ride just got rougher
Charu Chanana
Chief Investment Strategist
-
Quarterly Outlook
China Outlook: The choice between retaliation or de-escalation
Charu Chanana
Chief Investment Strategist
-
Quarterly Outlook
Commodity Outlook: A bumpy road ahead calls for diversification
Ole Hansen
Head of Commodity Strategy