May 2024
Economic conditions in Europe are improving while interest rates in the region could soon head lower. This augurs well for European stocks, which we upgrade to overweight.
Asset allocation: Europe edges ahead
April proved a cruel month for risky assets, but we believe that brighter times are ahead. Valuations for several asset classes now look more appealing while investor positioning in stocks is less bullish, increasing the scope for gains. Economic conditions are also turning more favourable, particularly in Europe, where interest rate cuts look likely and corporate earnings momentum remains strong.
For all these reasons, we retain an overweight stance on equities and a neutral one on bonds.
Within equities, our positioning is increasingly tilted in favour of European countries. Our business cycle scores show improving conditions in both the euro zone and the UK. We think that euro zone quarterly GDP growth can reach potential by end of 2024, exceeding 1 per cent annualised. Domestic economic activity is supported by a tight labour market and rising wages while terms of trade are also improving, which bodes well for exports. At the same time, the inflation picture is more stable than in the US, which should enable the European Central Bank to begin cutting interest rates in June.
