Danske Invest’s chief analyst Jan Holst Hansen still sees no sign of global growth slowing two months into the new year.
February brought further confirmation that global manufacturing is picking up and that we can expect high levels of global growth in 2017. We also saw evidence that the US and European economies, in particular, have rebounded strongly after a few lacklustre years, but political developments are acting as a drag on fundamental growth and a source of concern. Overall, however, global economic fundamentals still appear robust enough to overcome the political uncertainty.
USA: Trump – from euphoria to disappointment
US labour market data demonstrated continued strength in February. This will reinforce expectations of at least two US rate hikes this year – and we see the odds tipped more towards three than two.
On the political front, the prospect of Trump’s promised tax cuts has lent support to the markets in recent months. In our view, however, Trump will struggle to gain sufficient support in the Senate, where a number of Republican senators have expressed scepticism about his planned tax package. We see a potential disappointment in this area as a relatively large risk, but not enough to derail the strong fundamentals driving the economy.
Europe: Economic strength outweighs political woes
Turning to Europe, economic growth has been truly impressive. Germany and France have delivered strong data and both countries are growing far above their potential, while our best estimate for the eurozone as a whole is growth of close to 3% in February.
As in the US, strong fundamentals are being challenged by political concerns. The coming year is of course chock-a-block with elections, including in France, Germany and Italy, but tensions are also building ahead of July, when Greek government coffers will run dry and the country will have to turn to the EU and the International Monetary Fund (IMF) for help. With respect to the French presidential election, we see concerns here as slightly overdone.
China: Cooler housing market feeding through to the economy
Very decent growth figures in 2016 have afforded China the opportunity to focus a little less on growth and a little more on financial stability in 2017. Looking at the real economy, where credit to both corporates and households was tightened in October last year, we expect those measures will now have a moderate impact on growth in H1 this year. Going forward to the National Congress in October, we still expect China to deliver stable, though gently slowing growth.
Allocation and assets
We are still positive on risk assets, especially the equity market, where we see the greatest potential in European equities. We are therefore maintaining our overweight in equities, as we estimate the potential for corporate earnings has not been fully priced in. In contrast, we still harbour a degree of scepticism on corporate bonds.
We decided to reduce our overweight in emerging market bonds (local currency) in the past month. Some of the factors that made this position attractive have faded slightly, in our opinion. On the other hand, we now view the USD as attractive, as this could give an advantage if the political turmoil in Europe intensifies and weakens the EUR. Investors can benefit from a strengthening USD if they are invested in US equities or bonds.