Allocation

Investors are turning to Eurozone stocks from U.S. equities, the fifth largest rotation since 1999, despite the coming French election. Allocation to Eurozone equities rises to 15-month highs (net 48% overweight)...

We see a reduced near-term risk of trade wars, as President Donald Trump’s White House appears to have softened its stance toward both the North American Free Trade Agreement (NAFTA) and China. This could benefit emerging markets (EMs).

The accumulation of (geo)political risks sent markets on the haven side. Ten days before the first French election round, the outcome remains ever more uncertain. The advance in polls of the two lead contenders is eroding. Meanwhile, the resilience of the center-right and the breakthrough of the far-left candidate suggest a speculative four-players-game...

While a moderate candidate is the most likely victor in our assessment, the situation remains fluid with little risk priced in. In such an environment, we believe it is important to protect investors in our multi asset portfolios from market shocks. We have tactically reduced exposure to financial markets and increased exposure to the Japanese yen for its defensive qualities in times of stress.

Most reflation trades aren’t crowded or expensive, our research suggests. U.S. stock prices more fully reflect the maturing reflationary cycle, and we see better opportunities in Europe, Japan and EM stocks. We also prefer U.S. credit over government bonds.