(30 December 2019)DAILY MARKET BRIEF 2:Has the equity outlook improved?

The past year has offered significant headline risk and slowing growth. Global growth has moderated to a below-trend 3.0% rate in 2019, as investment slows and US-China tariffs bite. Separate US measures like the "Hong Kong Human Rights and Democracy Act" have irritated China's government. While US President Donald Trump has been impeached by the Democrat-held House of Representatives a trial by the Senate is likely to end with his acquittal, in our view.

But an improving outlook on trade and other risks calls for more equities. The US and China reached a Phase 1 deal on 13 December, with some US tariffs shelved, which should leave the US consumer intact, and China pledging USD 40bn in additional US farm good purchases over two years.

Not only has the Phase 1 trade deal improved the outlook for equity investors, Global manufacturing PMIs have been increasing since the summer, while Germany’s manufacturing PMI rose from 42.1 in October to 44.1 in November, and the US manufacturing ISM slipped slightly to 48.1 from 48.3. At the same time, macro signals suggest the EM-developed economy growth differential is likely to widen to 3.5% in 2020, up from 2.6% at present.

And last but not least, central bank monetary support has increased, with both the Federal Reserve and the European Central Bank having eased policy since the summer.

Consequently, we are increasing risk in our portfolios. We open an overweight in EM equities, and close our FX strategy's underweight in the Australian dollar versus the US dollar. We continue to take risk through carry strategies, which should benefit from improved sentiment and lower-for-longer interest rates. Attractive valuations for stocks relative to high grade bonds should lead to outperformance over a six- to 12-month investment horizon.

By UBS