Florent Bronès on our investment strategy recommendations for June
In our view, the bullish trend in stock markets will continue in the medium term, but volatility will remain.
Risks are back in the spotlight. Political issues in Italy in particular, and to a lesser extent in Spain, have raised doubts in European markets. Trade tensions between the United States and China on the one hand and between the US, the EU, Mexico and Canada on the other have re-emerged. The risk of an escalation exists. There was a period of risk aversion at the end of May.
In our view, the bullish trend in stock markets will continue in the medium term, but volatility will remain. Our optimism is based on three fundamental reasons: an improvement in corporate profits in 2018 and 2019, the small rate hikes expected, and finally, moderate equity valuations, except in the US market, which is expensive compared with historical standards. Savings flows into equities, at the expense of fixed income investments, will continue. Nothing so far undermines these three solid arguments.
Caution on bond markets. Bond yields generally fell during this "off" risk phase. But we believe it to be transitory. In our view, the Fed will make 3 more rate hikes of 25 bps each in 2018 and 2 in 2019 (one more than previously expected). No change in our targets for US 10-year bond rates, i.e. still at 3.25% in 12 months.