BNP AM

The sustainable investor for a changing world

The tug of war between rising real yields and slowing earnings growth remains a feature of US equity markets, while the knock-on effects of the war in Ukraine hang over European stocks and Covid lockdown concerns cloud the prospects for Chinese equities.  

In the US, we expect an inflation-busting Federal Reserve to raise interest rates to a level where growth will slow notably, if not – and more likely – contracts. Should US company earnings, however, remain encouraging, and the market’s policy rate expectations stabilise, equities could recover, just as they did in the first quarter. In our allocation, we are neutral on US equities.

On European equities, we are now underweight since we see significant downside potential for earnings amid continued pressure on both growth and inflation from the Ukraine conflict and Chinese supply chain issues. In addition, we expect an inflation-focused ECB to not shy away from policy tightening even as growth weakens. We would add to our short should markets rally.

We have added a short position in Japanese government bonds to underweights in US and European sovereigns, taking the view that a behind-the-curve Bank of Japan will act to deal with rising inflation, benefiting a weaker yen. We think it unlikely that 10-year JGB yields would move much lower from here. We have upgraded commodities to ‘favour’. Market dynamics/timing indicators and a window of opportunity have added to sound fundamentals such as deep demand-supply imbalances and heightened geopolitical risk.


These are highlights from our asset allocation monthly for May. Download the pdf


Disclaimer

Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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