As per the Q3 2018 outlook, Aviva Investors has reduced its overweight position in emerging market equities to neutral, part of a series of adjustments as US economic and political developments shape the outlook for global markets and the economy.
The Federal Reserve is likely to raise rates another six times by the end of 2019, the firm said in its third-quarter outlook, with strong economic growth in the US likely to drive global GDP growth towards four per cent this year, the fastest pace of increase since 2011. Growth expectations are less advanced elsewhere, with the European Central Bank and the Bank of Japan unlikely to move rates before the middle of next year.
Protectionist policies are the biggest threat to global markets. The US has announced, but not imposed, tariffs on $34bn of Chinese goods, with threats to extend the measures to up to $400 billion of Chinese inventory. If the current skirmish between the world’s two largest economies were to become a full-blown trade war, growth expectations would fall sharply for large exporters – including China, Japan, Emerging Asia and the Eurozone.
Actual asset allocation views from Aviva Investors:
– Marginal reduction in overall equity exposure: Reduced allocations to more cyclical regions, largely reflected in neutral exposure to emerging market equites, previously our highest overweight conviction; tighter US liquidity and weaker earnings growth makes EM materially less attractive.
– UK equities move from underweight to neutral: Higher oil prices and a fall in sterling have helped to improve earnings prospects.
– Moved to an overweight stance in US equities.
– Underweight position in government bonds remains unchanged.
– Added US to short duration positions in government bonds due to recent curve flattening, while cutting slightly the short duration on core Eurozone paper.
– Moved from roughly neutral on the US dollar to slightly overweight; positioned for a somewhat weaker euro, unchanged yen and depreciated Australian dollar.
– Much less pronounced overweight in EM local currency debt means our implied overweight in EM FX has diminished.