Cape Town - From a global market perspective, risk assets continued to perform well with strong gains to be found in Europe, particularly the peripheral equity and bond markets such as Italy and Spain.
This is according to the latest Global Market Perspective report from Schroders. The report unpacks whether investors have become complacent, reviews mid-year markets and looks at the historical market impact of presidential impeachments.
According to Keith Wade, chief economist and strategist at Schroders, the performance of risk assets continued to perform in Europe were enhanced for international investors by an appreciation in the euro as capital flowed back into the region.
In terms of asset allocation, Schroders has moved to a more neutral stance over the quarter by closing its overweight on equities and its underweight on bonds.
Within equity markets it remains positive on Europe - not including the UK and emerging markets. Within bonds it has a preference for emerging market local currency debt and remain wary of Bunds (a debt security issued by Germany's federal government) and investment grade corporates.
“The catalyst was the election of Emmanuel Macron as president of France, an outcome which quelled concerns of a populist revolt in a country seen as a bastion of the European Union (EU). In practice France chose not to follow the UK out of the EU and risk political and economic isolation,” said Wade.
READ: How to invest in times of political change
"Trump trade"
"Meanwhile, we have seen the further demise of the 'Trump trade' as, although the US economy would seem to have bounced back in the second quarter, progress on policy has been painfully slow."
Wade said the second quarter ended in much the same way as the first, with the US Congress delaying a vote on the critical healthcare bill, seen as a prerequisite for tax reform.
"Nonetheless, with a change in sector leadership, US equities have performed well led by technology and the more defensive quality stocks. We look at the performance of a broad range of assets in our mid-year review,” explained Wade.
These gains have been accompanied by an unusually low level of volatility and with the VIX index remaining close to all-time lows, many have argued that investors are ignoring risk.
Political uncertainty has diminished in Europe, but is alive elsewhere.
“Rumours continue to dog President Trump and whilst it is unlikely that a Republican Congress would impeach one of its own, this may change after the mid-term elections next year, especially if policy gridlock persists,” said Wade.
Brazil has also run into problems with President Michel Temer.
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