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Q3 2018 Equities Outlook- Peering Over a Steeper Wall of Worry
Traders Magazine Online News, July 24, 2018
With one-half the trading year behind, what does the third quarter hold in store for traders and investors.
Edmund Shing, Global Head of Equity & Derivative Strategy at BNP Paribas, shared with Traders Magazine his thoughts on what is to come as the market heads into the thick of the summer doldrums.
So what does Shing see? First and foremost, the markets will focus on Liquidity and inflation, not trade wars. He said that liquidity is a key equity market driver- overall liquidity, including the boost from share buybacks and reinvested dividends could remain far more potent over the second half.
Also, there will be a contrarian call on Europe.
“Above potential growth, rebounding core inflation and overly pessimistic sentiment could drive eurozone equities to outperform US equities for the rest of 2018,” Shing began. “In our view, there has been a 110% outperformance of US over eurozone equities over the past ten years. Over the short term, however, there have been bouts of European equity outperformance and we believe the stars could align for Europe to outperform the US for the rest of the year.”
Furthermore, he added the risk asset glass may still be half full. That is, Shing said he expects inflation as an understated driver for corporate profitability, and thus equities over H2 2018 and into 2019.
“US, and global, inflation are likely to rise in H2 2018 there are myriad pressures pushing up headline and core inflation,” he said.
On the trade wars that are sweeping the globe, led by US President Donald Trump, he sees Asia and Germany most at risk from further US trade tariff escalation and will be reflected in higher implied volatility levels for the DAX, KOSPI and MSCI emerging markets indices.
“Trade tensions are a potential catalyst for the sell-off in the European Autos sector. We retain our bearish view on this sector, based on its heightened sensitivity to financing costs, the fading US and UK car cycles and the need for European OEMs to switch away from diesel to electric/hybrid engine technology,” Shing said.
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