Head of Equity Strategy
Summary: Equities worldwide are on a roll, boosted by optimism about a US-China trade settlement. But the cheer isn't universal as both German and South Korean indices are holding back – are they being prudent or just over-cautious?
The US-China trade deal will obviously alleviate some of the nervousness among companies but a lot of damage has already been done. Financial conditions have already eased somewhat but the bigger question is whether they have eased enough to offset the negative dynamics in play. The OECD’s leading indicators suggest the weakest outlook against trend growth since October 2009 with December’s data still suggesting a substantial slowdown with the current slowdown from the recent peak on par with the 2010/11 slowdown driven by the euro area crisis. As a result of this we continue to position ourselves defensively in equities.
The current phase in the business cycle suggests that investors should be:
Banks, insurance, semiconductors, consumer durables
Software & Services, Telecommunication, Retailing, Pharmaceuticals, Biotech & Life Sciences.
The biggest story in February is the Chinese equity market rising 9% measured on the CSI 300 Index. There are several structural reasons for this from potential MSCI inclusion weight rising on Chinese equities on the next reset date, and the new ChiNext board which builds on the US technology board model to encourage investing in technology companies. But we prefer using proxies to gauge direction in China and especially the countries with deep export links.
If we zoom in on German and South Korean equities then both equity markets are mostly flat for the month suggesting little change in sentiment. As a result we are not buying into the positive Chinese sentiment in February but if German and South Korean equities begin to rally then the move is likely credible and more sustainable.