The international political situation remains complex. The tensions between the United States and China and fears about a protectionist escalation are holding back the performance of the markets, while the complex Turkish situation weighs on the entire emerging sector and the uncertainty regarding Italian fiscal policy hinders greater capital flows towards the Eurozone.
The economic data remain, however, overall positive, despite some signal of deceleration coming from the Eurozone and China. The second quarters of 2018 surprised positively in the United States (revealing a growth rate of earnings of 25% y/y), while in Europe they turned out to be in line with expectations.
In the absence of political concerns, markets would probably have reacted more positively. Instead, in a context of possible protectionist escalation, investors maintain a wait-and-see strategy while waiting for more clarity regarding the next moves of the United States, China and Europe. More precise indications are unlikely to come before the midterm elections in the United States, on November 6th.
We are neutral overall, with a moderate overweight in global equities – which trade at a discount of around 9% to the 30-year average – and US dollar-denominated emerging market government bonds, which yield around 6,5%. % and present a contained exposure to Türkiye (3,5% of the EMBI GD index). We also have some counter-cyclical positions, such as the JPY, US Treasuries and S&P 500 index puts. We maintain a cautious stance on fixed income with underweight positions on higher rated government bonds, with a focus on long durations in the eurozone, and on high yield in euros, which yields just 3,3%.
The Italian market, both equity and bond, has blown over a year's gains and is once again under pressure. Investors are worried about fiscal policy which could be prosecuted by the new government. In our opinion, the deficit deviations compared to previous governments could turn out to be limited, but uncertainty will remain high until the presentation of the Economic and Financial Document (September 27) and the budget law (sent to the European Commission by October 15) .
As far as government bonds are concerned, we are waiting to have greater visibility on the budget law; if there were to be further episodes of high volatilitytargeted purchases on short maturities could be considered. We remain underweight on the Italian equity market, due to the impact of higher yields on the economy and some specific risk factors for some large-cap stocks.
