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 are in “fair” territory. Nonetheless, downward revisions to earnings expectations have begun to emerge, reflecting a deteriorating economic environment and raising the risks of upward pressure on valuations going forward, particularly in the US.
Momentum for equities remains negative by the 10-month moving-average metric that we favour. This is cause for caution.
Sentiment in markets remains overbearish, as equity fund flows remained negative in October. Usually this would be a buying signal but when paired with negative momentum and a precarious economic climate, it is best to not act just yet on this signal alone.
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.
