Our Global Equity strategists continue to have a constructive view on equities. They are looking for
strong earnings delivery in the current reporting season to provide support to markets. More than a
quarter of the companies have reported in the US and Europe to date, and despite a few notable
disappointments, results have been quite encouraging. Almost 90% of the companies are beating estimates
in the US (the highest proportion of beats since the team started compiling the data in ’09). In Europe
as well, results are coming in stronger than the rather subdued expectations. Courtesy of the weaker
Euro, the proportion of companies beating on sales has spiked from 45% in Q1 to almost 60% in Q2. The
team believes that strong Q2 numbers will set the stage for earnings upgrades into the rest of the year.
They also note that the activity backdrop is starting to improve as flash PMIs (based on G3) remain
consistent with above trend global growth. Within DM, the team has been advocating OW on US equities,
while maintaining a cautious stance on the UK. UK suffers from an adverse growth – policy tradeoff. FX
could end up as a “lose-lose” proposition for FTSE100. If GBP moves higher, UK equities will most likely
lag, as they traditionally do. If on the other hand, GBP breaks lower from here, it would be due to some
tail risk political outcome materializing – such as a hard Brexit or early elections, in which case the
traditional inverse correlation between UK equities and the GBP might stop working. Moreover, UK performs
relatively better when global equities are falling and when bond yields are moving lower, as it is a
defensive high dividend yielding market. In contrast, our strategists believe that global equities will
move higher in H2, and expect bond yields to move higher too.
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