The global economy continues to benefit from a backdrop of strong growth momentum, subdued inflation and low market volatility. Overall, we downgrade US and European investment grade (IG) credits to underweight from neutral, although we remain neutral Asian IG given relatively attractive yields on offer
Meanwhile, relative to the opportunity set, risk premia associated with equities remains attractive. Both current valuations and macro fundamentals suggest we should add to our global equity allocation. We upgrade this asset class to overweight from neutral. Elsewhere, valuations are still extreme across global developed markets bonds where we remain underweight. Finally, we continue to emphasise emerging markets equities and local currency debt
Source: Bloomberg, Thomson Financial Datastream and HSBC Global Asset Management Limited, data as at 31 August 2017
The Fed left interest rate unchanged in September’s meeting but signaled it still expects a rate hike in December. It also confirmed to begin its balance sheet reduction in October in a gradual and predictable manner. US congress approved to extend the debt ceiling and provide government funding until December. In addition, Trump unveiled a tax reform plan, calling for lowering the corporate rate from 35% to 20%. On the economic front, data were mixed and some of them are likely disrupted by negative effects of Hurricane. Non-farm payrolls increased by 156,000 in August, below a downwardly revised 189,000 in July and also market expectations. CPI rose 1.9% year-on-year in August, above July’s 1.7%, but it was due to rising shelter and gasoline cost as Hurricane Harvey shut down refineries along the Gulf coast. Also, retail sales unexpectedly fell 0.2% month-on-month in August, from July’s 0.3% gain, as auto sales declined most likely due to the Hurricane. On the other hand, ISM Manufacturing PMI rose from 56.3 in July to 58.8 in August, the highest reading since April 2011, while housing starts slid 0.8% from July, marking the 2nd straight month of decline.
US equities rose to record high amid the declined concerns over hurricane and better sentiment boosted by Trump’s tax reform plan during the month. The details of balance sheet normalization gave no surprise to markets and its impact should be moderate in the beginning, due to the Fed’s gradual approach. However, the Fed’s rising expectations for the third rate hike this year was slightly beyond expectations. US dollar rebounded from as low as 91 level to over 93 amid the Fed’s hawkish stance and optimism over Trump’s tax plan. Going forward, the geopolitical tensions should continue to bring market volatility to US equities. Meanwhile, we should closely monitor the effect of balance sheet normalization under the backdrop of high valuation in US stocks. We continue to maintain SLIGHTLY NEGATIVE outlook.
Provided by BCT Financial Limited
Global equity market continued to move higher in the second quarter of 2017. Europe and UK equity market outperformed US equity market on the back of currency gains, while Asian stock markets beat major developed markets two quarters in a row. In USD terms, S&P 500, DAX, CAC, FTSE 100 and NIKKEI rose 2.57%, 6.80%, 6.66%, 3.57% and 4.96% respectively. Also in USD terms, Hang Seng Index and MSCI AC Asia ex Japan Index gained 6.38% and 7.45% respectively. Strong corporate earnings, receding political risk associated with French Presidential election and lower medium- to longterm US government bond yield resulted from easing expectations on the pace and magnitude of Fed rate hike all helped stock market performance. USD weakened as market expectation on Fed rate hike eased, fallen 7.27% and 3.78% against Euro and Pound Sterling respectively over the quarter. In Asia, stock markets benefited from rising corporate earnings and positive changes in macro backdrop for individual country/region. This includes the election of new President in South Korea led to lower political risk, Hong Kong stock market was boosted by favourable change for Chinese banks. For instance, rising bond yields in mainland China may result in widening in the net interest margin and non-performing loans problem could improve on government efforts to de-leverage.
The above “Market Review” information are provided by Sun Life Asset Management (HK) Limited.