The end of the first round of the French elections brought some relief to the financial markets: so far, the winners are the European stock markets and the euro. The uncertainty that gripped the markets until mid-April dissipated and the risk on trade returned to the markets. By this we mean that, since the summer of 2016, investors have shown a marked preference for equities and commodities and avoided bonds and other defensive investment instruments.
The economic indicators for the euro zone were better than expected last month, while we saw rather more disappointing indicators in the USA. An example: producer confidence in the USA fell in April, while producer confidence in the euro zone rose further to its highest level in recent years.
The dollar is weakening against the euro: any price gain on the S&P 500 could be wiped out if the dollar falls. On the other hand, any price gain on the S&P 500 will lead to a similar rise in other major stock markets. The US stock market remains a major direction indicator for other regions. European stock markets are more attractively valued than the US stock market.
The main economic indicators continue to point to a growing global economy. However, in April the investment committee found that the economic momentum remained strongest in the euro zone and emerging countries while a decline could be seen in the USA in particular. This may indicate a temporary blip in the USA but if this trend persists in the next few weeks, it could be a sign that we should adopt a more cautious approach to equities.
For clients who have neutral to dynamic profiles, we favour bonds from emerging countries, while the more defensive profiles continue to invest mainly in inflation-linked bonds from the euro zone.
As we have already explained, investors continue to prefer risk-bearing assets such as equities, avoiding more defensive asset categories such as government bonds. These emerging market bonds continue to perform well. They are primarily benefitting from inflation in countries such as Brazil, Russia and India. This lower inflation means that central banks in those countries can lower their short-term interest rates, supporting economic growth in those countries. The prospect of better economic growth combined with lower inflation expectations enables this bond category to continue to perform well.
We retain a slightly positive assessment of both the price of gold and industrial metals. After all, we continue to see confirmation of steady economic growth globally. This is having a positive effect on demand for commodities in general and industrial metals in particular. Copper, zinc and aluminium are raw materials that are frequently used for construction and infrastructure works. The economic recovery should therefore give them a boost.
The price of gold remains an attractive opportunity in view of the defensive aspects of the yellow metal, but we are also counting on a falling dollar having a positive impact on movements in the gold price.
Points to note
In historical terms the market recovery since March 2009 is already advanced. Nevertheless, there are currently plenty of signals indicating that the upturn in the markets is not over yet and that the economic figures are following a positive trend. We therefore choose to adopt a dynamic approach to the portfolios under management.