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Choose equities as long as the global expansion continues
By Herman Van Papendorp
Although lower global equity returns and rising volatility are typical for late-bull cycle phases of the global business cycle, when policy tightens and the yield curve flattens during the transition from a ‘goldilocks’ period for equities (strong growth and low inflation) to a reflation period (strong growth and rising inflation), Momentum Investments expects global equities to still outperform global government bonds as long as global expansion continues. With the leading indicators of an imminent US recession still absent and only pointing to a rising likelihood for US recession by 2020, historical precedent would see global equities still doing well into 2019. In addition, government bond market fundamentals remain negative (with rising inflation and some fiscal deterioration), while the wide bond valuation premium with equities still persists. The future path of the US dollar is likely to be a major determining factor for relative regional global equity returns. During weaker US dollar periods, local currency returns in the US and EM equity markets typically outpace those in Europe and Japan, and vice versa. EM fundamentals are better than during the 2013 US Taper Tantrum (with higher real policy rates and smaller current account deficits), while strong EM growth in the absence of a global trade war should be supportive for equities.