SUMMARY ASSET ALLOCATION
At first sight, May was a fairly quiet month for financial markets. Equities, real estate and commodities were practically flat over the month and only gained in euro terms as the common currency weakened versus the US dollar. Bonds lost some ground in US dollar terms, but the slippage was driven more by currency movements than by yields. However, during the month, risky assets first retreated and then recovered briefly before running out of steam. So what were the drivers? Firstly, weak company earnings globally. Secondly, the outlook for US growth and monetary policy and thirdly, the assessment of the risks coming from China. With these themes still well alive, we have remained defensive in our asset allocation. We are underweight equities, emerging market debt in hard currency and commodities. We have shifted some of our duration exposure from broad eurozone government bonds to US Treasuries.
A weak earnings season
Not much had been expected from the first-quarter earnings numbers. So, as usual, most US companies managed to exceed the analysts’ expectations. At 76%, the ‘beat rate’ of companies that released better-thanexpected results was slightly above the rates of the previous five quarters. Even though more companies managed to beat the sales forecasts, this quarter’s rate fell short of the longer-term average. In Europe, where beat numbers have always been lower than in the US, earnings and sales beats were low, even for European standards.