Money/Credit/Debt
Europe credit flows are stabilizing, hence a major drag on the region’s growth will dissipate. What does this development imply for European equities?
Climbing US bond yields, alongside higher oil prices, might spoil the party for global risk assets. There are budding cracks in EM domestic bonds, and even though we like this asset class in the long run, investors exposed to it should reduce their positions for now.
We are not yet ready to downgrade equities on a tactical basis but continue to expect we will eventually do so. We present a checklist of indicators that we are watching to determine when to de-risk.
Italy is no longer Europe’s problem child. Investors will be better off reassessing their views of Italian assets, which represent a buying opportunity on a structural time horizon.
We assess where emerging markets debt is on a strategic and cyclical basis. We find it has benefited from local central banks boosting their inflation-fighting credentials and governments improving financial stability. As a result, EM debt is behaving less like a risk-on asset, changing the role it plays in a global portfolio. We also expand our asset allocation playbook by assessing how the asset class behaves across the business cycle. While EM debt is more than a risk-on play, we suggest investors stay cautious on a cyclical horizon.
