Roger Keller On Our Investment Strategy Recommendations For October 2018
In our view, the medium-term bull market is not over.
Caution maintained on bond markets in particular European. No change to our 12-month target for the US 10-year bond rate, i.e. still at 3.25%; given the rise in US rates in recent weeks, we believe that most of the rate increases are behind us, and we do not have any reason to revise up our target (moderate Fed tightening, no acceleration in inflation, growth set to slow in 2019). No changes either at the ECB, which has confirmed that it will remain accommodating by gradually reducing its Quantitative Easing programme by the end of 2018 without changing its official rates before summer 2019. Our 10-year rate target is 1.25% for the German bund. We are still neutral on High Yield in euros and dollars. We remain positive on convertible bonds in the eurozone and on the EM bond segment in local currency.
Volatility in the coming weeks and months is very possible as long as short-lived risks persist: after the good news on the trade tensions front (agreement between the US-Mexico and Canada), the markets are now focusing on the Italian risk because of a more accommodating fiscal policy which the markets, the European Commission and the rating agencies may judge in a negative light. The Brexit issue has still not progressed.
In our view, the medium-term bull market is not over. Our optimism is based on three unchanged fundamental reasons: the rise in company profits in 2018 and 2019, the small rate hikes expected and finally, the moderate equity valuations. The US market is expensive compared with historical standards but its valuation is less tight than a year ago thanks to profit growth. Nothing so far undermines these three solid arguments