As we move into the second half of 2019, risky asset prices and the underlying fundamentals are at a crossroads. Central bank accommodation and falling global bond yields have provided a boost for global equities and risky assets in general, causing them to rally even as economic growth has been slowing. In fact, the Global Manufacturing PMI recently slipped into contractionary territory—below 50—its lowest level since late 2012. While global equities have been resilient, certain commodity sectors have responded more directly to the evidence of slowing growth and softening demand.
From a multi-asset class perspective, we believe it’s critical to incorporate broad themes from the current macro environment as well as more specific drivers of return in order to provide the most nuanced views on asset classes.
Figure 1: Global Views as of 7/23/19
|Global Markets||Main Drivers|
|Positive on DM equities||Supportive stimulus, attractive valuations and positive sentiment, albeit earnings strength is weak|
|Positive on EM equities relative to DM equities||Attractive relative valuations and quality, supportive stimulus, partially offset by poor sentiment|
|Negative on DM bonds||Poor valuations and carry continue to weigh down outlook, while sentiment remains positive|
|Neutral U.S. Dollar vs. DM currencies||Poor valuations, sentiment and stimulus, offset by positive carry and growth|
|Neutral on Petroleum||Negative quality, inflation and global growth, offset by positive carry|
|Positive on Industrial Metals||Strong quality (supply/demand) and sentiment, partially offset by weak inflation and growth|
|Positive on Precious Metals||Positive stimulus and sentiment|
Amid these conflicting signals, we have become more bullish on equities and commodities, more bearish on DM bonds, and neutral the U.S. dollar. Specifically, as central banks have moved to a dovish policy stance, stimulus becomes a more bullish driver of equity markets (both developed and emerging), as well as precious metals. The impact from growth indicators has been more diverse. As overall equity markets have rallied, growth has become a negative for DM bond expectations, but as emerging market equities have lagged developed market equities, the impact from growth on petroleum and industrial metals has been more bearish.
Sentiment has shifted considerably, improving our view for DM equities, petroleum, and metals, while contributing to an improved neutral U.S. dollar view. Asset-specific drivers, such as supply/demand balance and seasonality effects in the case of commodities, are also exerting varying levels of influence on the outlook, and capturing their impact allows for more nuanced views within each asset class.