On our daily Morning Calls
, we have pushed the idea that European equities should strategically be underweighted as the continent’s equity market has few catalysts. Europe is export-driven and thus vulnerable to current trends of nationalism and protectionism. In addition, the two largest sectors in global equities, technology and financials, are either non-existent for the former and very weak for the latter, making European equities less attractive.
European equities are only interesting as a tactical bet when there is a positive change in the global economy due to their large exposure to materials and industrials. Overweight equities versus bonds
With a global recession still at least 12 months out on the horizon based on the current available data, equities should still be overweighted versus bonds. Global equities are still not expensive in outright terms (see chart below) given earnings growth and global economic activity. The global bond market is still not offering an attractive alternative to equities as a yield component in any portfolio. Previously, bonds could offer both return and diversification during stressful periods; now, the yield component is gone but bonds should still be used to hence downside diversification.
Even US bonds remain unattractive for foreign investors as the interest rate differential is eaten up by currency hedging unless non-US investors want to assume the USD risk, but with the trade-weighted USD trading 13% above the historical average since 2006, it seems like a risky proposition.