Euro Area

Risk assets are stuck in a range driven by the Fed feedback loop. But the current rally may continue for another quarter or two.

It is the perfect time to add protection, given the 13% rally in stocks over the past six weeks and the current steepness of the VIX term-structure.

For the month of March, the model outperformed both global and U.S. equities in U.S. dollar terms. For April, the model has further pared back its equity risk exposure, shifting the allocation into cash. While Europe remains the largest equity overweight, there was a modest recalibration to defensive markets such as the U.S. and Switzerland. The allocation to EM was also nudged up a bit, on momentum and valuation grounds. In the fixed-income space, the model is sticking with U.S., Italian and Spanish paper.

Special Report

There is little evidence suggesting that declining productivity growth in recent years has resulted from measurement error. Businesses have plucked many of the low-hanging fruits made possible by the IT revolution, while cyclical factors stemming from the Great Recession have also weighed on productivity. Low productivity growth tends to be deflationary in the short run, but inflationary longer-term. For now, this is good news for bonds, but is likely to become bad news by decade-end.

The British pound may be prone to further weakness in the coming months as the odds of a Brexit rise.

Special Report

Headline and aggregate-economy statistics such as GDP and income are no longer representative statistics for the living standards of the vast majority of the population. This <i>Special Report</i> discusses the implications for politics, economics and investment.

While the FOMC was more dovish than expected, rising inflation may cause the Fed to escalate hawkish rhetoric. The bounce in oil should help high-beta stocks. Underweight U.S. equities versus Europe, Japan and H-shares. We estimate U.S. equities will deliver returns of 4%, ann. over the next 10 years, <i>vis-à-vis</i>  9% for the euro area and Japan, and 14% for H-shares. Central banks have more options to combat any possible debt-deflation spiral in Europe/Japan/China than is often recognized.

A surprisingly dovish outcome from this week's FOMC meeting has led to broad-based weakness in the U.S. dollar. The monetary policy divergence supporting the dollar may have peaked.

Special Report

Most of the economic arguments in favor of the U.K. leaving the EU do not carry much weight, as we discuss in this collaboration between BCA's <i>Geopolitical Strategy</i> and <i>European Investment Strategy</i>. However, the probability is a coin toss - much higher than investors tend to think. We review the geopolitical and investment implications of the "Leave" and "Remain" scenarios.

Unlike in the U.S., current opportunities in consumer discretionary stocks lie in Europe and Japan. NIRP in the euro area will likely prove a powerful tonic for local consumers, and discretionary spending (top panel). The ECB is aggressively easing monetary conditions and is injecting unprecedented liquidity into the banking sector which should entice bankers to extend credit instead of hoard cash, on the margin. In fact, the ECB is squarely targeting banks to grow their lending books and provide breathing room to the economy, especially in the credit-starved periphery. Following the double-dip recession, euro area credit growth is slated to reaccelerate, as the ECB's fresh TLTROs and QE should open the lending spigots (second panel). On the labor front, while euro area unemployment is still running at double digit rates, excess slack is diminishing. The implication is that pent up consumer demand is only now being unleashed in the euro area, which should boost relative share prices (third panel). None of this encouraging consumer discretionary demand backdrop is reflected in ultra-cheap valuations, given that euro area consumer discretionary stocks are trading at a 25% EV/EBITDA discount to the global consumer discretionary index. Bottom line: Overweight euro area consumer discretionary stocks in a global portfolio (see the next Insight).