Economics: There are a few outliers, but most recent data suggest that global manufacturing growth and
goods pricing will pick up in H2. Regionally, Europe is looking more normal but China still vulnerable
due to trade conflict. Our economists haven’t lowered global growth numbers on trade because a strong US
is offsetting a weaker China, but they are on watch that lower confidence will depress capex relative to
strong profits growth.
Our Global Equity strategists continue to recommend using trade headlines driven dips as a buying
opportunity, expecting robust growth fundamentals in H2. They believe that the widespread concerns around
the yield curve’s flattening are premature. In fact, they suggest that the eventual sell signal may not
even work this time round. Usually, the curve inversion reflects the tightening monetary conditions and
worsening credit backdrop. However, the curve could invert in this cycle purely because it was so
desynchronized regionally. Germany and Japan are in a sense anchoring the long end of the US yield curve.
Their work suggests that the current shape of the yield curve is consistent with double-digit equity
performance over the next 12 months. The yield curve has always tended to flatten once the Fed started to
hike, and the stocks didn’t tend to peak until after the yield curve got outright inverted. Furthermore,
equities tended to move higher for almost a year after the outright inversion. They think that there is a
good possibility that the curve steepens next before it ultimately inverts. This could happen if trade
tensions ease in 2H and if growth accelerates at the same time. Finally, bank balance sheets are capital
rich, HY spreads well behaved, and lending standards keep easing.
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