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Time to be selective in equities

05 July 2019

By Gerald Moser, Chief Market Strategist

Improving trade tensions and a dovish turn from the US Federal Reserve (Fed) and the European Central Bank (ECB) bolstered risk assets in June, notably equities, after the market weakness seen in May. So where next for equities in the second half of 2019?

Top of the range

The S&P 500 Index is trading around the 2900 level. However, last month we argued that the S&P was likely to trade in a range of between 2700 to 2900 and end the year between 2900-3000.  So we advise being selective when investing in equities and not relying on indices to deliver much more return.

We advise being selective when investing in equities.

While the upside in broad developed market indices is likely limited from here, we continue to see opportunities. For this reason, we advocate active management over passive, as single-stock selection is going to be necessary to achieve high returns from current equity market levels.

The risk of a melt-up

The conjunction of a dovish Fed and ECB, a trade agreement between the US and China and a rebound in manufacturing activity, would trigger another leg-up in equities.

While lower yields would likely push valuation multiples higher, improved fundamental data could generate positive earnings momentum. Furthermore, earnings expectations, notably in the US, are cautious and upward revisions could help equity markets to rise further.

The ebb and flow of risks is unlikely to vanish soon and equities could fluctuate accordingly.

However, the scenario above is not our base case. The ebb and flow of risks is unlikely to vanish soon and equities could fluctuate accordingly.

Preference for US equities and emerging markets

From a regional perspective, we continue to have a preference for US equities and emerging markets (EM). A more dovish Fed, coupled with a more conciliatory tone between large regions on global trade, could help EM to perform well over the rest of the year.

The outlook is more challenging for European equities. Financials, the largest sector across the European benchmark, is struggling with low interest rates and the recent easing bias from the ECB will likely worsen the situation.

Favoured sectors

We prefer consumer discretionary, healthcare and communication services. Those sectors offer structural growth, a much sought-after characteristic in a low-growth environment. Consumer discretionary benefits from a healthy household sector on the back of a historically low unemployment rate. Communication services benefit from the growing trend in digitalisation and online services. Meanwhile, healthcare offers structural growth due partly to an ageing population, with a defensive bias.

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Market Perspectives July 2019

Find out our latest key investment themes. As more dovish central banks and trade tensions drive sentiment, what are prospects for the rest of 2019?

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