The economic outlook remains in slowdown judging by the forward-looking indicators we measure. While this is favourable for risk assets for the time being, the index has been trending downwards for several months and is at risk of deteriorating further.
Valuations have again turned expensive. November’s rally of risk assets has caused equity valuations to rise, again pushing the asset class into “expensive” territory. Further downward revisions to earnings expectations are likely to keep upward pressure on valuations going forward, particularly in the US.
Momentum for equities has turned positive by the 10-month moving-average metric that we favour. However, we prefer to wait until momentum has proven to be sustainably positive before taking any action.
Sentiment in markets remains bearish, although the indicator has softened on the back of a weaker dollar and recovering equity flows.
As ever, we are constantly monitoring markets. Should conditions change, particularly with regards to the economic regime or signals from our valuation, momentum and sentiment framework, we will adjust our asset allocation accordingly.
