SUMMARY ASSET ALLOCATION
Last month we mentioned the risk of two interest-rate rises in the US still to come this year. With the Federal Reserve leaving key rates on hold in September, clearly
that risk has faded. While many macroeconomic growth indicators have improved, we expect central bank policy generally to stay highly accommodative for the time
being. This should be positive for risky assets, yet on balance, equities barely moved in September. Government bond yields spiked around the middle of the month, but dropped back quickly. We think risky assets now amply discount the improvement in the economic growth outlook. Given the challenging environment for company profits, we have maintained a cautious stance in our asset allocation.
Global economy: from weakness back to modest growth
After the weakness in the first half of the year, macroeconomic indicators have started to improve. Confidence in the manufacturing sector, as shown by manufacturing PMIs, has increased in a range of countries. The global GDP-weighted average rose to 51.2 in September, which is not much stronger than in previous months, but the average for emerging markets reached its highest level since February 2015. In the eurozone, the Economic Sentiment Index jumped in September, as did the German Ifo index. In the US, the ISM manufacturing index moved back to above 50, the level which separates growth from contraction, after a brief dip to below that level in August. Consumer confidence has improved in the eurozone and Japan. Global trade data has also started to recover from the weakness in the first half.
We do not expect the global economy to escape from modest growth though since we do not see any drivers for such a positive move. Globally, company profit growth is weak to modest and companies have been reluctant to engage in capital spending. Especially in the US, profit margins have been under pressure from weak productivity growth and rising unit labour costs. The risk is that companies will start rationalising on labour. The eurozone economy has been driven more by consumption in the past year, but with the tailwind of falling oil prices fading, one could have doubts about its sustainability. The unemployment rate has stalled at
10.1% for five straight months. Credit growth is marginally positive, but the risks in the banking sector remain. Massive monetary and fiscal stimulus in China has stabilised the economy, but no more than that. Overcapacity, rising leverage and an unproductive use of capital remain risks for the Chinese economy. In Japan, current growth looks too low to generate any inflation.