Robust growth supporting equity markets

The global economy continued to expand robustly in April. Several economic key figures indicate the global economy is growing above its long-term potential, and we are continuing to see the positive effects of the turnaround in global manufacturing and still accommodative fiscal and monetary policies.

Going forward, we expect global growth to remain robust, which will support both corporate earnings and sales growth and hence equity prices. Overall, economic developments continue to indicate 2017 will be a good year for equities – which is why we have an overweight in equities at the moment with a particular focus on European equities, where we see greatest price potential.

Politics once again dominated the agenda on both sides of the Atlantic in April, and we expect politics will continue to affect market sentiment going forward.

USA: Low expectations may deliver a positive surprise
US economic data have been mixed, with confidence indicators – both business and consumer – pointing to a somewhat stronger economy in Q1 than the hard data, such as production figures.

Overall, though, we are comfortable with developments in the US economy, where the March jobs report (released in April) again showed a fall in the unemployment rate, which is hovering close to 4.5%. Hence, the US economy is now at full capacity and the labour market is beginning to overheat slightly.

Turning to Washington, we had more news from Donald Trump in April. Market sentiment has been rather volatile: for  while optimism was running high in the post election period, with significant expectations for tax cuts and deregulation, etc., this has turned to scepticism, with the market now very much focused on Trump’s testy relationship with Congress and his struggles to enact legislation.

Trump repeated his tax ambitions towards the end of the month, though without any specific indications of how they could be realised. We estimate Trump could indeed push through his tax plans, but the result will be more a straightforward tax cut rather than any major tax reform. We also estimate that any upcoming tax cuts will be less than what Trump has indicated. However, this will not trigger any strong market reaction, as expectations here have reached such a low that there is now the potential for a positive surprise.

EUROPE: French presidential election continues to cast a shadow
The main event in Europe in April was the first round of the French presidential election. While opinion polls ahead of the first round suggested we need not be concerned about a win for Euro-sceptic Marine Le Pen, the market was nevertheless jittery, as the polls had proved poor predictors of both Brexit and Trump. Hence, EU- and reform-friendly Emmanuel Macron scooping most votes and progressing to the second round against Le Pen was a positive surprise.
With the polls indicating a resounding win for Macron over Le Pen in the run-off, we continue to view the risk of a ‘bad’ result in France – in the form of a Le Pen win – as very modest.

Turning to the economy, business confidence rose further in April and is now indicating a European economy growing at between 2.5% and 3% annualised – in other words, significantly above trend. Core inflation also delivered an upside surprise towards the end of the month, rising to 1.2%, which was much more than expected and evidence of how Europe’s economy has been reinvigorated.

CHINA: Beijing keeping a tight rein on growth
Turning to China, the economic figures here were stronger than expected. GDP grew at an annual rate of almost 7% in Q1, which was above market expectations. However, we could also see that lending growth had slowed.

These two factors reflect how the Chinese economy has accelerated and that the politicians in Beijing have noticed. Hence, the government has quietly begun to tighten economic policy, as can be seen on a number of fronts. Among other measures, the government made borrowing for home-buying more difficult in March and April. It has also tightened the rules governing the financial system, so that especially activity in the – less regulated – shadow banking system can be monitored.

In light of the above measures, we assess that China is generally trying to ensure financial stability and essentially wants to see a modest slowdown in growth rather than an abrupt stop. We therefore expect the economy will grow more slowly but still above trend in the coming quarters.