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LGT Beacon: Robust fundamentals will sustain the bull market

May 10, 2017

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).

Macro fundamentals remain positive

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: 

  • The forward-looking purchasing manager surveys have started to diverge recently, softening in the US and China, while extending gains in the other economies, especially in the Eurozone. However, they all comfortably remain in positive territory globally.  
  • Following a steady cyclical recovery and the simultaneous commodity market stabilization over the past twelve to 15 months, global trade has also started to rebound late last year, and leading trade indicators suggest further gains in coming months.
  • Importantly for equities, corporate earnings have rebounded markedly around the world. In addition, most companies also remain able to beat a gradually rising level of consensus expectations. Thus, valuations are not as high as they seem in markets such as the US (where valuations have risen the most over the years), and can still be considered attractive in markets such as Europe and Japan - i.e. the preferred regions in our current tactical asset allocation.  
  • Last but not least, on balance, the monetary policy settings of most major central banks are broadly appropriate to help sustain this cyclical upswing, without risking runaway inflation (especially after the recent pullback of industrial commodity prices from their recent peaks). 

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.     

Read more in the LGT Beacon

Read about the resulting investment positioning changes in our portfolios in the LGT Beacon below. To subscribe to a weekly newsletter, go to subscriptions.

Note: The next edition of the LGT Beacon is scheduled for 24 May 2017.