The first half-year was very good, and we are expecting another good half-year ahead. Central banks continue to be accommodating and, for the first time in years, we anticipate a simultaneous pickup in both the emerging and advanced economies. We continue to move in the direction of a "Goldilocks" economy, or moderate growth with low inflation and low interest rates. Equity markets, in particular, favor such an environment.
But this ideal constellation also has its downside. For one, valuations in almost all asset classes are at historical peaks. This is followed by the fact that asset inflation has failed to jump-start wages – a key inflation component. This may please corporations, but not wage earners. Their frustration is also a factor threatening the Goldilocks world, as there are two scenarios for investors now: a world with good margins and valuations thanks to low labor costs but with the risk of social discord; or accelerating wage inflation with a negative effect on margins. In the latter case improved sentiment and more buying power among wage earners could, however, result in higher sales, thereby compensating somewhat for the rise in labor costs.
In all the elation surrounding Emmanuel Macron's election – a key reason we now favor Europe over the United States – we haven't overlooked the fact that this election has also marginalized two mainstream parties. Dissatisfied wage earners also surely played a key role in the Brexit vote and Donald Trump's election. Therefore, we will keep a close eye on political currents, while believing that the risk has clearly shifted from Europe to the United States. This shift is one reason we changed our euro/dollar forecast. The new forecast ($1.10, previously $1.00 per euro) is not far away from current levels, though, because we fear the euphoria over Europe may overshoot. At the same time, we are not ready to write off Trump. His strength remains making it hard for his critics to overestimate him. And his followers may soon become so accustomed to today's governmental reality that even the smallest of successes will be celebrated – also in the stock markets. Expectation management therefore will remain an important task for investors to accomplish, also in the second half-year.
Stefan Kreuzkamp, Chief Investment Officer
