Trade tensions cast cloud over healthy economic fundamentals
(London) Aviva Investors, the global asset management business of Aviva plc (‘Aviva’), said the environment for risk assets had deteriorated amid trading tensions and a less synchronised view of global economic expansion.
The global economy is on track for another year of solid growth at just under four per cent, similar to 2017, although the picture is a little more uneven across countries and regions than the widespread growth evident last year.
The above-trend pace of growth has led to tighter labour markets, with wages finally moving higher in regions other than the US. Stronger wage growth and continued employment gains will underpin consumption across the major economies and, with robust corporate profitability and positive demand prospects, business investment should continue to improve over the coming year.
An escalation of the bilateral trade dispute between the US and China, when almost all central banks are tightening policy, is the main threat to the outlook. The imposition of sanctions has not been big enough to affect global trade so far, but a broadening of tariffs by the US and retaliation by China, or more extensive trade disputes affecting other countries, would result in a materially lower growth forecast and moderately higher inflation expectations.
Stewart Robertson, Senior Economist, Aviva Investors, said:
“While we remain constructive on the fundamental outlook, the downside risk over the coming months from increased trade tensions means we are more cautious on the near-term outlook for risk assets. As such, we are close to neutral in our view on equities, moderately favouring the US, Europe and Japan over the UK and emerging markets. Should trade tensions subside over the next few months, we would be looking to move to a more overweight position on equities.”
Latest asset allocation views from Aviva Investors:
- Slight reduction in equity risk this quarter and a small increase in our long US dollar bias versus a range of currencies.
Allocation to government bonds remains underweight and we prefer to take risk via short duration as opposed to long equity risk.
Long-held cautious stance on Australian assets has played out well and we expect that most of the adjustment in terms of a weaker currency and bond yields has materialized.
Credit remains aggregate underweight given comparably expensive valuations.
We switched our high yield preference to Europe from the US. We are more cautious on the US as valuations have not yet come down, but Eurozone spreads have widened substantially on worries over Italy and the exit of the European Central Bank from quantitative easing.
Reduced small overweight emerging market local currency debt position to neutral given pressures on emerging market central banks to raise rates to protect currencies.
Neutral on emerging markets across asset classes in the expectation that tighter conditions for US liquidity will present ongoing headwinds.
The full document can be read here.
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