Optimism crosses the Atlantic to Europe in Q2

The equity market upturn of the past six months can be expected to cool in Q2, when we will have a modest overweight in equities and see greatest potential in European equities, says Danske Invest's chief analyst Jan Holst Hansen in his market commentary.

The second quarter will in many ways belong to Europe. Ahead lies a crucial presidential election in France that is not just about who will lead the republic, but also about Europe’s future.

We see Europe as still being overly pessimistic on European politics, while at the same time failing to adequately acknowledge that companies are again earning money. The European equity market will benefit from there being no rate hike on the table from the European Central Bank (ECB), in contrast to the US, which can look forward to two further rate hikes before the end of the year.

Trump effect fading
The US economy is still growing significantly above trend, but we do not expect this pace of growth to continue in Q2. The optimism that Trump’s promised tax package and advertised infrastructure investments stoked after the election has now been replaced by a more realistic approach. We expect, for example, that Trump’s tax package could disappoint.

While economic growth will help support corporate earnings to an extent, we expect US equities will come under pressure and that the positive trend we saw in Q1 will not continue. We expect US equity prices to generally remain flat or rise very modestly in Q2 and that the market will experience increased volatility due to political uncertainty and upcoming interest rate hikes.

Presidential election grabbing attention
Europe is still experiencing very decent growth, though we expect this will also slow slightly. Unlike the US, the European economy and equity markets do not face interest rate hikes in the near term despite the ECB becoming more aware that it will at some point have to begin normalising monetary policy. Should EU critic Marine Le Pen lose the election, as expected, to the more moderate Emmanuel Macron, European equity prices could receive a significant boost when the markets let out a sigh of relief.

China supporting growth
We expect China’s economy will neither surprise nor disappoint in Q2. The government will continue to support growth through, for example, infrastructure investments if growth looks like slowing. We are therefore not concerned about Chinese growth, which we expect will hover around 6.5% this year – the government growth target.

Our allocation
Overall, we expect just a modest return on global equities and see the bond market coming under pressure, as central banks will help push yields higher. We are therefore underweight in bonds going into Q2, though overweight in emerging market debt issued in local currency. We estimate European equities could perform strongly in Q2, whereas we only see a potential for modest returns from the global equity market.


Noget gik galt.


Noget gik galt.


Noget gik galt.