The Investment Clock: Keep calm and Macron!

Trevor Greetham, Head of Multi Asset

In a marked contrast to the surge in risk sentiment that followed President Trump’s election in November, markets greeted Emmanuel Macron’s victory in the French presidential election with satisfaction and relief, rather than euphoria. After rallying strongly on opinion polls that accurately predicted the outcome, the euro held onto most of its gains, while equities rose only slightly, as the good news was already almost fully factored in.

Macron undoubtedly still faces many hurdles as he forms a new government, and attempts to bring down unemployment and implement labour market reform, but his decisive victory over far-right opponent Marine Le Pen has at least removed a significant source of political risk, and has reassured markets of the ongoing integrity of the euro area, for the present.

Nevertheless, the French election was just the first of several risks which may test markets over the coming months. As we approach the thin summer trading period, global economic data suggest that the recent surge in growth may be peaking, and there are signs that Chinese data may be weakening.

Investor sentiment, having dipped into the ‘depressed’ zone ahead of the second round of the French election, has become more bullish since the outcome, but there has been no return to the ‘euphoric’ levels witnessed earlier in the year, which reflects the ongoing cooling of the ‘Trump trade’.

Seasonality is negative for stocks from May, and prices, which tend to be volatile during the summer months, will also be vulnerable to geopolitical setbacks or surprises in the near term, including threats or delays to US stimulus packages or a repeat of the Greek debt crisis.

Source: Datastream World USD Total Return, average calendar year profile 1973 to 2014, rebased to 100 on 1 January. Average seasonal profile of the MSCI World equity total return index in US dollar terms since 1973.

Meanwhile, the risk of rapid interest-rate tightening has decreased, with the US Federal Reserve likely to continue with its gradual, predictable interest-rates rises, while other central banks maintain their loose monetary policy; global inflation will probably slow as the oil price ‘base effect’ fades out of year-on-year figures.

Our Investment Clock captures this, showing that the business cycle is moving away from the ‘overheat’ phase, where growth and inflation are rising, towards the ‘recovery’ phase, where growth remains positive but inflationary pressures fade.

This phase has historically been positive for bonds as well as equities. In light of this, and of the onset of the seasonally poor period for equities, we have trimmed our overweight position in equities and reduced our underweight in bonds across our multi asset portfolios, and have initiated a small overweight position in global high yield bonds in some funds as an alternative way to obtain exposure to cyclical sectors.

Our longer-term view remains positive for stocks, as low inflation and falling unemployment should trigger the move into the bond and equity-friendly ‘recovery’ phase. There is plenty of evidence that the upward trend in global growth will continue, even if the rate of expansion cools.

As opportunities for lower entry points are likely to arise from any geopolitical stress or growth concerns during the summer, we will look to add to our exposure in equities, as well as in other key beneficiaries of the ‘Trump trade’ (such as the US dollar and US smaller companies), where performance has faded from its post-election highs. Longer term, we believe the positive backdrop will continue, with loose monetary policy and steady growth driving stock prices higher.