Global Asset Allocation: The View From Europe

Outlook: New World Order

• Increased trade policy angst has threatened the resiliency of global growth whilst stoking fears of inflation, warranting a more cautious stance.
• US growth expectations are slowing under the weight of uncertainty, whilst sentiment in Europe, the UK and China is improving on policy support hopes, despite tariff threats. 
• With monetary policy remaining broadly accommodative, disruptive trade policies could force central banks to make uneasy choices to support growth despite threats of higher inflation, which is most pronounced in the US. 
• Key risks to global markets include escalating trade wars’ impact on growth and reaccelerating inflation, central bank missteps and geopolitical tensions.

Themes Driving Positioning

Cold feet

Almost every measure of consumer and business sentiment, aka ‘soft data,’ has notably deteriorated amid rising uncertainty around trade policy. Whilst sentiment usually lags ‘hard data,’ like employment and spending, today’s soft data are signalling a far more dire outlook than the hard data are implying. The real concern is if businesses and consumers continue to face this level of uncertainty for a prolonged period. If this is the case, they are likely to have cold feet when it comes to investment, purchasing and hiring decisions. With trade disputes lasting for nearly a year and a half during President Donald Trump’s first term, the sentiment could be right this time around, foreshadowing a deeper slowdown in the economy. Given the heightened risk, we continue to lower our equity exposure.

European vacation?

For most investors, the outperformance in European equities this year has been a big surprise. The start of the year saw Europe facing a bleak economic backdrop, lingering war between Ukraine and Russia, political discord and threats of US tariffs on the horizon. This follows decades of turmoil, including political instability, debt crisis and Brexit, leaving most investors sceptical in allocating to the Continent. The recent outperformance, however, comes amid notable policy shifts, including increased fiscal spending from Germany on defence and infrastructure and a more unified commitment from leaders across the region on improving competitiveness. Despite tariff uncertainty, sentiment toward the region has quickly shifted, and flows are following. We see this as more than a short vacation, and we have been adding to European equities, on upside potential to capex spending and lending.

 

For a region-by-region overview, see the full report (PDF).