Review
«Return of the cyclical»
Globally oriented cyclical equities made an impressive comeback in July. This was due to the slightly improved global economic outlook, a trend that also confirms Merrill Lynch’s global economic cycle model. In June, the model signaled the bottoming of a slowdown in growth and switched to recovery mode after almost two years of economic decline. Despite only a slight improvement in growth prospects, investors have shifted from expensive, defensive equities to cheaper, more cyclical ones. From a quantitative perspective, this means that value outperformed growth, high risk outperformed low risk, and low quality outperformed high quality.
The shifts mainly benefited the clearly underweighted sectors of banking, energy and raw materials. However, the outlook for the European economy remains gloomy. Merrill Lynch’s European economic cycle model has been in recession mode since January.
Outlook
«Further slowdown in Europe and glimmers of hope»
According to the representative leading indicators, the European economy may slow down again in the coming months. For investors, this means continuing to maintain a defensive position. Investors should favor companies with strong balance sheets, low risk parameters, stable growth, positive earnings forecasts and higher market capitalization. The focus should be more on global companies rather than those aligned with Europe.
Countries such as Switzerland, Sweden and the UK, which account for a relatively large proportion of their exports outside Europe, should therefore be more attractive to investors.The European small-cap segment, with its strong focus on Europe, should be avoided if possible.
In the past, uncertainty before US presidential elections has often prompted American companies to postpone planned investments until after the vote, which is why important leading economic indicators tend to be weaker before an election.
Although the political orientation of the winning candidate (Democrat or Republican) has a bearing on the performance of individual sectors, it has little effect on the market as a whole. However, should Donald Trump be elected in November, it could trigger widespread upheaval on the international capital markets. The prospect of a protectionist economic policy has led to repatriation of capital invested abroad, and combined with Trump’s threatened capital controls, could strengthen the dollar against certain emerging countries, such as China. This, in turn, would harm export-oriented US companies and put pressure on commodity and energy prices.
Trump’s planned expansive fiscal policy, which includes tax reductions and infrastructure programs, would stimulate the US economy to the benefit of the domestic economy in particular. However, this policy would be accompanied by higher debt and probably lead to a sharp rise in interest rates.
If Hillary Clinton is elected, the consequences for companies and investors would be much more predictable. Her economic policy should also have a positive effect on the US economy and thus on the performance of equity markets.
It is fair to say that the global economy will not gain momentum until after the election. We therefore expect a more cautious position from investors and a rather subdued performance of the stock markets until the vote is decided. Should Clinton win, we expect a more long-term rotation from expensive, defensive equities to cheaper, globally oriented cyclical ones.
Equities with top ranking according to QSS approach
| Equities Switzerland | Equities Europe |
|---|---|
| BARRY CALLEBAUT | ADIDAS |
| GIVAUDAN | RECORDATI INDUA. CHIMICA |
| ABB | BOLIDEN |
| SCHWEITER TECHNOLOGIES | COMPASS GROUP |
| BELIMO HOLDING | INTERTEK GROUP |
