In light of the economic upturn and abating political risks in Europe, we advocate a regional shift to European equities, at the expense of US equities. At a sector level, we suggest investors to consider switching from energy to industrials, as we are taking an even more pronounced pro-cyclical equity stance.
Positive fundamentals continue to support equities. Global stock markets are experiencing a range of positive conditions: a synchronised worldwide economic upturn is underway, interest rates remain low in absolute terms and double-digit earnings growth is expected this year. Longer-term earnings-per-share expectations are also rising, based on an increase in fiscal spending, which could potentially fuel higher multiples. Stock valuations are not cheap. Higher valuations, however, are counterbalanced by low interest rates, which make equities a relatively attractive asset class. A possible risk to the favourable equity outlook would be faster-than-expected rate hikes in the US, but this is not expected, given the Fed’s cautious approach.
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