Asset selection
Market sentiment has split in two. For the euro-zone and the US, there was a correction that did not affect trends and equities are still favoured. In the UK and Japan, sentiment is moving towards favouring bonds. In all cases, the neutral vote remains large. This may be fuelled by doubts about central banks, but more due to political risk. For old hands, seeing Japanese bond sentiment rising may be surprising. However, low interest rates and deflation are matched by similarly low rates in other areas.

The economic situation is clear. Markets expect a soft landing, followed by a dip in growth. The euro-zone and US reflect this. Politically, two conflicts are raging: Trump’s trade war with China and Brexit. Both are considered to be risky. In the UK case, that amounts to an early vote of no confidence in PM Johnson. In addition, a ‘no deal’ Brexit would leave the UK more dependent on world trade, so more sensitive to the US-China trade war.

Country allocation
Markets trust that both US and euro-zone central banks have enough “fire power” to smooth the expected dip. Yet, neutral sentiment remains high, reflecting populism. Neither has policies in place to flatten income distribution, so long-term insecurity remains.

In Japan and the UK, both net sentiments are negative and similar, with neutral sentiment rising in Japan, yet stable in the UK. However, a hard Brexit would have permanent negative consequences, while the trade war with China may lose US Congressional support quickly: if Republicans doubt that Trump will be re-elected, discipline will suffer and he will lose more power. Attacks on Senate speaker McConnell – whose responsibility is to maintain

Republican Party discipline – highlight this. In this sense, either the market view of the future of UK equities is too mild, or its view on Japanese equities is too harsh, especially as Japan is mulling a weakening of its currency.

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Peter Kraneveld, international pensions adviser, PRIME bv



Supporting documents

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