So, how bad is it?

“Business investment is very high and the level of unemployment is so low that there are more jobs to fill than unemployed for the first time in history.” This is how Wilbur Ross, secretary of commerce, described the situation. The June manufacturing ISM survey was a surprise last Monday, with a sudden 2.5-point acceleration in economic activity to 60.2 and construction spending up 0.4% in May. Growth figures will probably be close to 3%.
So everything is just fine? Not really. With global growth at a peak, and with the surge of populism and protectionism, there are lots of reasons to be worried. But it’s too easy to cry wolf before taking time to check whether the noise has turned into a signal.

Let us look at the current situation.

Oil shock:
Consumer purchasing power is beginning to be affected, and Europeans are being squeezed, in addition, by the weaker euro. USD 1000bn will be redistributed to oil-producing countries. The lack of investment and the resurgence in political risk in the Middle East and Venezuela are offsetting the peak of growth and shale gas output.

Political risk:
The real topic here is Brexit, now that risks in Italy have receded with the appointment of the new government

Risk of a trade war:
We have shifted from threats to deeds, but to what extent? We calculate that all measures taken together should subtract 0.20% in growth in the US and China, and 0.50% under extreme scenarios. But more than the actual measures that have been taken, it’s the current perception that is squeezing investor confidence

At forward P/Es of 13 and 17 in the euro zone and the US, valuations have become reasonable, barring a collapse in earnings forecasts. Quarterly earnings reporting season will soon begin in an environment in which dispersion of performances has seldom been so strong. Growth stocks (in European luxury goods, US tech, etc.) are close to their highs, while value stocks (financials and cyclicals) are down sharply. Value stocks could be in for a drastic rerating of favourable releases

After a start of the year that is favourable to equities, momentum has recently reversed itself

There are more negative signals than at the start of the year but not enough to make us change course. We are therefore staying invested and slightly underweighted in risky assets (45%) and steeply underweighted in corporate bonds in order to limit losses in the event of a downside shift while capturing a possible rally triggered by a reassuring earning season. Expected returns on equities have indeed declined with higher risk, but we believe they are still positive and the only reasonable investment. Now’s the time, but it won’t be easy…