SUMMARY ASSET ALLOCATION
Risk assets struggled in October. Global equities fell by 1.8% in US dollars and eked out a gain of only 0.5% in euros due to the appreciation of the dollar.
As an asset class, real estate showed bigger losses, while commodities were flat in US dollars. Bonds did not provide a safe haven: the global aggregate bond index fell by more than global equities. In fact, interest-rate concerns drove bond yields higher and equities lower. These concerns overwhelmed both positive earnings news from US companies and improved economic data. We think the investment climate remains challenging for risky assets. Our main scenario of modest growth has now been discounted fully and we see global equities as slightly expensive. Given the downside risks to growth, we remain underweight in global equities, with a preference for an underweight in Europe.
Leading indicators have been positive lately. In October, the US Markit manufacturing purchasing managers’ index (PMI) jumped to 53.4 and the services PMI rose to 54.8, taking the composite index to an 11-month high of 54.9. The manufacturing and services PMIs in the eurozone both rose to 53.5 and the composite index reached 53.7.
China’s manufacturing PMI slipped to 51.2, but this is still the highest level since July 2014. Broad-based gains are leaving our global GDP-weighted manufacturing PMI on track (not all countries have reported yet) to climb to 52.0, rising to 53.0 in developed economies and 50.2 in emerging markets. That would be the first positive reading in emerging markets since February 2015. In the US the improvement was confirmed by the ISM manufacturing index. In the eurozone the Economic Sentiment Index and the German Ifo index recouped the losses from earlier this year.Download to read more