According to Pictet Asset Management, world stocks rose modestly in August as expectations grew that the European Central Bank would loosen its monetary policy in a bid to boost economic growth and avert deflation.
The S&P 500 index closed above 2,000 for the first time, also helped by upbeat US economic data. The rally was driven by financial shares – seen as the main beneficiary of any cheap money from the ECB.
A positive second-quarter earnings season with earnings surprises in all three major markets gave an additional support. The prospect of further monetary stimulus in the euro zone drove emerging stocks to a fresh three-year high, with Latin America and Eastern Europe outperforming other markets.
The absence of further deterioration in the Ukraine crisis also supported stocks in Russia and in the region. Broader emerging market bonds saw slim gains, with dollar denominated debt remaining the best performing fixed income asset class so far this year.
Japanese stocks underperformed other major markets, falling 1.7 per cent on the month in USD terms. The country’s economic outlook deteriorated with second quarter GDP contracting a hefty 6.8 per cent on an annualised basis due to the effect of the consumption tax hike in April.
Expectations of further ECB action boosted the region’s government bonds. Benchmark yields in Germany, Italy, Spain and elsewhere hit the lowest level since the inception of the euro, while Euro overnight interest rates dipped into negative territory for the first time. In currency markets, the euro hit its lowest level in 11 months against the dollar.
The USD scaled a one-year high against a basket of major currencies. This helped USD-denominated assets, including US high-yield debt which was the best performing fixed income asset class of the month with a gain of 1.5 per cent. A stronger dollar pressured commodity prices, with oil falling nearly 3 per cent on the month.
Overall Pictet maintains its neutral equity stance. Oil is upgraded while the US dollar is cut to a single over weight.
Regionally Pictet upgrades Europe to neutral on the back of improving valuations, better liquidity and a weaker euro; Pictet cuts US to a single underweight.
Sector wise energy is upgraded on valuation grounds and rising geopolitical risks. Pictet downgrade consumer discretionary to a single underweight.
And finally Pictet preference goes to hard currency and corporate emerging debt; Pictet underweight stance on government debt remains unchanged and corporate debt should benefit from the search for yield.
