Investec Asset Management presents its latest Multi-Asset Indicator. The main catch is a stronger dollar, and a positive economic and investment outlook, especially for equities.
Economic data from the US is consistent with above-trend growth. For now, the US Federal Reserve (Fed) continues to highlight slack in the labour market, but if employment growth continues at close to its recent pace, the Fed is likely to move forward the date of the first interest rate rise to the first half of 2015. This should support a stronger US dollar, which is beginning to perform well, especially given softer inflation in Europe and some disappointing Japanese data.
Second-quarter corporate earnings have, once again, beaten expectations and company management teams are no longer guiding analysts’ estimates downwards. A combination of expected earnings growth of roughly 10% for this year, even stronger earnings growth the following year and forecasts stabilising after long periods of relentless downward revisions, has contributed to the passage of time slowly reducing the market’s valuation. This makes further market gains likely in the remainder of the year.
The clearest trends in developed market sovereign debt remained in euro-zone bonds, with German Bunds, in particular, extending into strength. Further evidence of a loss of economic momentum across certain sectors, another lower-than-expected inflation print and on-going geopolitical concerns all encouraged this strength. In contrast, data in the US remained firm, although US long rates remained at the lower end of their multi-month ranges.
July could represent a watershed for global corporate credit markets. Spreads widened across both investment grade and high yield markets, with credit quality determining the extent of weakness. US markets led the sell-off, accompanied by outflows from high yield ETFs. The sell-off in credit assets during July has improved valuations.
Across all currency markets, the dominant force in July was the broad-based strength of the US dollar. The most resilient G10 currencies to this strength were sterling and the Japanese yen which were secondary beneficiaries of a reduction in global risk appetite. An aggressive extension of the appreciation of the US dollar is improbable in the near-term, although cyclical drivers remain skewed towards greater US dollar strength thereafter.
Overall, the inevitable never-ending sequence of geopolitical events in various corners of the globe does not detract from a positive economic and investment outlook, especially for equities.
You may access Investec Asset Management’s full Multi-Asset Indicator through this link.