Europe

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.

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).

The ECB's new stimulus measures are a sign that the ECB is now looking to provide more direct stimulus to domestic demand by supporting credit growth. The interest rate cuts, and the weaker Euro that comes with it, are over for now.

This <i>Special Report</i> reviews all of our active recommendations, including our over/underweight country and asset allocation positions, as well as our current tactical trades.

The euro stopped weakening in March 2015, which coincided with the ECB starting its asset purchases. Since then, the ECB's incremental policies have been unable to push the euro lower. The price action speaks to the resilience of the currency and indicates that a lot of bad news has been discounted.

Cutting through the hype that will surround policy initiatives today, the ECB is caught between a rock and a hard place. We explain why, and what it means for investors.

In recent travel, our clients remain focused on downside risks to today's range-bound markets. And for good reason. Uncertainty regarding Chinese reaction function is the biggest source of political risk in today's markets. We discuss it in detail in this month's report, along with an update on our views of Brazil, Russia, and Turkey. In addition, we examine the potential casualties of the European immigration crisis and the likelihood of Donald Trump becoming the president of the United States.

We still recommend a cautious stance on portfolio risk, for both credit and duration exposure, given that monetary policy expectations priced into Developed Market yield curves are already extremely dovish.