With geopolitical tensions rising, the uncertainty that has permeated the markets in the past six months shows no signs of abating. But, for investors, opportunities are still presenting themselves. Although talk around the fading ‘Trump Trade’ is growing (even if some doubt that it ever existed), a synchronized global recovery in corporate earnings is creating some interesting openings. Investors looking to areas that may have previously been out of their comfort zones are reaping the benefits.
“Investors are willing to put some capital to work at the moment; they’ve seen the economy turn up and some are positioned to take advantage of that, but they’re also cautious because of the escalating political tensions emanating from Europe and the U.S.,” says Kurt Reiman
, Chief Investment Strategist of BlackRock Canada. “There is optimism as we enter the second quarter, but that’s mixed with a fair number of worries about the risks.”
Momentum is slowing in the U.S. and there is widespread disappointment around what Trump’s administration will be able to achieve with regard tax reform and infrastructure spending. Given the failure to repeal and replace the affordable care act, the euphoria that swept through the markets after Trump’s election is starting to look misguided. As doubt increases in the U.S., a broader expansion is happening in Europe and economic data in China is looking much more positive than people expected a year ago.
“Despite the feelings of caution, we still prefer taking an overweight position in equities versus bonds and we’ve been targeting exposures in the stock markets that still have a fair amount of value,” says Reiman. “That means we would look to Europe, emerging markets and Japan rather than North America for the better opportunities.”
In Europe, Reiman is attracted by better income and consumption data, improving PMIs and first quarter growth that’s outperforming the U.S. With all the factors considered, Reiman sees a substantial valuation discount in European equities.
If certain investors were too eager to buy into the enthusiasm of theTrump trade in the aftermath of the election, then the opposite was true with emerging markets, which sold off on concerns around protectionism. “There is now less room for protectionist measures and there has been a relief rally in the emerging markets where performance has been quite strong – that’s another area we’ve been favouring for the best part of the past year and it’s done very well,” Reiman says.
“We think there is still room for continued upside. Earnings look good, economic data is still showing strength and it is clearly at a discount to valuations here in North America. We are seeing a synchronized economic expansion that tends to lift EM, and we’re particularly focused on Asia.”
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