Between the Dutch parliamentary election and the French presidential contest’s first round, global equities appeared to be losing momentum for a while. But now, with perceived Eurozone breakup risks fading again, it’s time for investors to refocus on the fundamental drivers of this bull market: a growing global economy, rebounding world trade, and resurgent corporate earnings.
Last Sunday’s political events boost confidence in the European Union. In France, the pro-European Emmanuel Macron won over his nationalist challenger Marine Le Pen by a larger than predicted margin. Meanwhile, in a regional election in Germany’s northernmost state of Schleswig-Holstein, the Christian Democrats decisively beat the Social Democratic incumbent, signaling that Chancellor Angela Merkel is regaining political momentum ahead of the country’s federal election in September.
Consequently, Eurozone risk premia have largely evaporated, stock market volatility has collapsed globally, while equity prices have generally extended gains - although European market responses to Sunday’s elections were weak, suggesting that these political trends had already been baked into prices for now. After all, Eurozone equities had already performed extraordinarily well in the run-up to the second and final round in the French presidential election (see page 2).
In any case, predictions of a meaningful correction have been proven wrong again, which offers another reminder that the current bull market is underpinned by economic fundamentals. More importantly, while a volatility outburst will certainly occur at some point, the following benign macro trends should help sustain the bull market further beyond the very short term:
We reaffirm our strategy and reiterate our regional and currency views
Against this background, we reaffirm our meaningful overweight in equities, and our big underweight in government bonds, with a preference for debt with relatively short maturities. We also reiterate our - recently reduced - long US dollar position as well as our new Swedish krona long, held against the Swiss franc. The Nordic EU member state’s currency is among the most undervalued. It thus has significant potential to benefit from the renewed confidence in the euro as well as the Eurozone’s ongoing broader economic rebound.
Note: The next edition of the LGT Beacon is scheduled for 24 May 2017.