As detailed above, Japanese equities are benefiting from a weaker yen, a supportive domestic policy mix and relatively attractive valuations. Also, the US tends to outperform in periods of market uncertainty. We expect stronger growth and a rise in corporate earnings following the prospect of post-election reflationary policies and consolidating oil prices. However, we remain cautious, due to the uncertain political environment, and have thus maintained our slight overweight in equities. As a result, we believe there is further room for an outperformance of equities. In terms of asset allocation, risk appears to have switched from equities to bonds as the prospect of a US recession in 2017 has sharply diminished. Over the past month, investor positioning has strongly shifted from bonds (mainly US) to equities. The BoJ should, however, face little pressure to lower rates further against the backdrop of a weakening yen and rising global yields.Ĭross-asset: slightly overweight on equities.Although, in relative terms, Japanese equities have never been so profitable, this is not yet reflected in the relative valuation.Japanese equities offer a hedge against a stronger USD.Inflation measures are showing early signs of bottoming out and might now be supported by a recovery in crude oil prices, a weaker yen and stronger wage growth.As the measures taken in the US on reflation policy have been successful, similar measures taken in Japan should have the same effect.The country is benefiting from a realignment of its policy mix: accommodative fiscal policy is now in line with monetary policy.
Japan to benefit from regime change in the US However, asset purchases will be reduced from €80 billion to €60 billion starting from April. The ECB will extend its asset purchase programme beyond March 2017 for nine months until the end of December 2017.The Bank of Japan is innovating with yield-curve targeting through unlimited bond-buying.The Bank of England remains supportive.The FED is expected to announce a second rate hike of 25bps at its December 14 th meeting, and markets also forecast two rate hikes in 2017 and another 2 in 2018 each.The Federal Reserve’s tightening cycle is ongoing, while monetary policies in Japan, the Eurozone and the UK remain highly accommodative. The expected policy gap between the US and the rest of the world is likely to increase in the coming months. In this context, we have kept our GDP forecast in the euro area close to 1.5% for 20. Political risks are, nevertheless, manifold for 2017, with elections scheduled in the Netherlands, France and Germany, and the expected start of the Brexit negotiations. Furthermore, the accommodative monetary policy continues to support easier credit conditions both for firms and households. Despite the increase in political uncertainty, economic activity remains on track, supported by a weaker euro and improving labour market conditions. Since November, economic policy uncertainty is on the rise in Europe, led by the UK. As a result, we have revised upwards our GDP forecasts in the United States to 2.3% in 2017 and 3.3% in 2018.Įuro zone: positive economic sentiment despite political uncertainty Moreover, the election of Donald Trump should increase the potential for reflation in the US through fiscal stimulus, tax cuts and regulatory easing. Given these reassuring metrics, the markets have priced in one Fed interest rate hike in December, two in 2017 and another two in 2018.
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Meanwhile, labour market conditions are still improving and wages should accelerate further and support consumption within an economy close to full employment. We are now neutral on emerging markets: the election of Donald Trump and prospects of a more hawkish Federal Reserve have led to substantial capital outflows from emerging countries.Įconomic activity remains well oriented, with expected GDP growth of 2.2% in Q4 and a continued expansion of economic activity indicators.
Economic indicators are clearly in uptrend mode, with the exception of the UK. Global growth is becoming more synchronised.
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