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Opportunities and risks for investors in Q3

We are in a Goldilocks scenario writes chief strategist Tine Choi in her new Quarterly View.

The global economy is currently in the best possible investment scenario – a Goldilocks scenario of low inflation and sensible, stable growth.

“Both equities and bonds thrive in this environment, and we expect the global upswing to continue and economic growth in both 2017 and 2018 to be above the long-term average. However, given that yields are very low we see equities as more attractive than bonds. We therefore have an overweight in equities focused on the European market,” says Danske Bank’s chief strategist Tine Choi in her new Quarterly View.

In this latest Quarterly View she assesses the financial markets at the start of Q3 and outlines the opportunities and risks she observes from an investor’s perspective. Despite the Goldilocks scenario she does not expect equity prices to rise at the same pace as during the past year, as the acceleration in global growth has peaked.
 
Expect 5-8% return from equities
“More modest economic growth indicates a moderation in corporate earnings growth, which will limit the potential for equity prices to rise, so we have therefore recently reduced our overweight in equities from substantial to moderate,” she says.
 
Global equities have over the past 12 months generated a return of 20.2% (measured in EUR), but Tine Choi expects a more modest return on equities of 5-8% in the coming 12 months.

“However, that is still a reasonable potential return compared to the low yields on bonds, and as long as Goldilocks reigns, remaining on the sidelines could prove expensive for investors,” she says.

When Goldilocks disappears …
The challenge, however, is that we don’t know when Goldilocks will decide to scarper. Predicting the turns in the business cycle is very difficult.

“When Goldilocks disappears we can expect greater volatility in the equity market than in the past year, and it is irrelevant whether she runs away because inflation accelerates or growth unexpectedly declines. Both will puncture the enthusiasm of the equity market and could trigger a rotation across regions and sectors. That is why it is important to have the right spread in your equity investments, so you have a bulwark to protect you from being unnecessarily hard hit by price falls in particular regions or sectors,” Tine Choi says.

Read the new Quarterly View


 

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