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Highlights
- The world economy continues to weaken. Risks of a synchronized slowdown are on the rise. On the positive side, the decline of the oil price is bringing down headline inflation, paving the way for further conventional and unconventional monetary stimulus. Real income in the developed world should rise. Furthermore, Europe’s leaders have once again managed to give the can a firm kick down the road.
- We expect the world economy to show renewed strength in the fourth quarter. A global recession is not our baseline scenario, but it could be the consequence of a renewed deterioration of the eurozone debt crisis or a major oil price shock resulting from a unilateral Israeli strike against Iran.
- The prospects for emerging debt are better than those for government debt. Local currency government bond yields are currently averaging 6.1%. This is attractive compared with developed markets government debt. But we continue to prefer investment-grade credits to emerging debt thanks to a better risk/reward pay-off.
- Within equities, we remain hesitant to upgrade our still somewhat negative view on financials. Outside financials, we continue to have a slight preference for selected cyclical sectors, IT and consumer discretionary. Until recently, these sectors had beaten the market. Earnings revisions are still above the market average. But the current economic conditions warrant a cautious approach.
Macroeconomic view
The world economy continues to weaken. Risks of a synchronized slowdown are on the rise. The sharp decline in the US manufacturing sector, with the ISM slipping from 53.5 in May to 49.7 in June, was a major disappointment. But the ISM non-manufacturing for June offered some stability; although it also weakened, a 52.1 reading still signals expansion. There was some slightly more positive news elsewhere.
In Japan, the quarterly Tankan index was stronger than expected, rising from -4 in March to -1 in June. And the final eurozone PMI for June rose from May’s reading, but still pointed to a significant contraction (46.4). The malaise in the eurozone has reached the core. Even Germany is seeing a modest drop in output. Large emerging markets continue to show signs of weakness.
On the positive side, the decline in the oil price is...
Read more in the PDF (10 pages) below.
- The world economy continues to weaken. Risks of a synchronized slowdown are on the rise. On the positive side, the decline of the oil price is bringing down headline inflation, paving the way for further conventional and unconventional monetary stimulus. Real income in the developed world should rise. Furthermore, Europe’s leaders have once again managed to give the can a firm kick down the road.
- We expect the world economy to show renewed strength in the fourth quarter. A global recession is not our baseline scenario, but it could be the consequence of a renewed deterioration of the eurozone debt crisis or a major oil price shock resulting from a unilateral Israeli strike against Iran.
- The prospects for emerging debt are better than those for government debt. Local currency government bond yields are currently averaging 6.1%. This is attractive compared with developed markets government debt. But we continue to prefer investment-grade credits to emerging debt thanks to a better risk/reward pay-off.
- Within equities, we remain hesitant to upgrade our still somewhat negative view on financials. Outside financials, we continue to have a slight preference for selected cyclical sectors, IT and consumer discretionary. Until recently, these sectors had beaten the market. Earnings revisions are still above the market average. But the current economic conditions warrant a cautious approach.
Macroeconomic view
The world economy continues to weaken. Risks of a synchronized slowdown are on the rise. The sharp decline in the US manufacturing sector, with the ISM slipping from 53.5 in May to 49.7 in June, was a major disappointment. But the ISM non-manufacturing for June offered some stability; although it also weakened, a 52.1 reading still signals expansion. There was some slightly more positive news elsewhere.
In Japan, the quarterly Tankan index was stronger than expected, rising from -4 in March to -1 in June. And the final eurozone PMI for June rose from May’s reading, but still pointed to a significant contraction (46.4). The malaise in the eurozone has reached the core. Even Germany is seeing a modest drop in output. Large emerging markets continue to show signs of weakness.
On the positive side, the decline in the oil price is...
Read more in the PDF (10 pages) below.
