- The corporate earnings season is producing fewer surprises
- The main support for the equity markets is the lack of alternatives
- Chinese government's measures are exacerbating the country's excessive debt problem
Although most companies have perfected the art of managing analysts’ expectations, the corporate earnings season is producing fewer surprises although the general trend of a slowdown in profits seems to be continuing. This is the view of Guy Wagner, and his team, published in their monthly analysis, ‘Highlights’.
After the rebound in February and March, equity markets saw little change in April. The S&P 500 in the United States, the Stoxx 600 in Europe, and the MSCI Emerging Markets (in USD) gained respectively during the month, while the Topix in Japan gave up a bit. “Since most companies have perfected the art of managing analysts’ expectations, the corporate earnings season is producing fewer surprises although the general trend of a slowdown in profits seems to be continuing. The main support for the equity markets is the lack of alternatives, even though the deterioration of economic fundamentals is of increasing concern”, says Guy Wagner, Chief Investment Officer at Banque de Luxembourg and managing director of the asset management company BLI - Banque de Luxembourg Investments.
Stabilisation of China's economy is due to the government’s stimulus measures
Although the global economy is continuing to grow, there has been notable divergence in the different regions’ performance in recent weeks. While growth in US gross domestic product (GDP) slowed on the back of weak investment and exports, China’s GDP climbed. “However, the stabilisation of China's economy is once again due to the government’s stimulus measures which are exacerbating the country's excessive debt problem”, believes the Luxembourgish economist. In Europe, economic growth is stable despite a host of political crises. In Japan, the hoped-for economic recovery under the ‘Abenomics’ plan has not yet materialised.
Europe: no prospect of a change to the ECB’s accommodative monetary policy stance
As expected, the US Federal Reserve kept its key interest rates unchanged at its April meeting. Fed Chairman Janet Yellen left the door open for a potential increase in interest rates during the year, although she remained very reticent about such a probability. In Europe, in response to a raft of criticism in recent weeks, European Central Bank’s (ECB) President Mario Draghi justified the rationale of the negative interest rate policy. Guy Wagner: “There is no prospect of a change to the ECB’s very accommodative monetary policy stance of recent years.”
European government bonds could despite weak or even negative yields gain
Bond yields rose slightly in April. Over the month, the 10-year government bond yield inched up in Germany, in Italy, in Spain and in the United States. “In Europe, the main attraction of the bond markets, despite their weak yields, lies in the prospect of interest rates going deeper into negative territory and this being implemented on a greater scale by the ECB during 2016. In the United States, the higher yields on long bond issues give them some residual potential for appreciation without having to factor in negative yields to maturity”, concludes Guy Wagner.