Developed Countries

We are sending you the Q2 <i>Global Investment Strategy Outlook</i>, which discusses the ten predictions we expect to drive global financial markets throughout the rest of the year.

No significant change in allocation was made. Direction wise, weights in Spain and Switzerland were increased slightly at the expense of Netherland and Sweden.

Fed dovishness is weakening the U.S. dollar. As the ECB and BoJ move to the sidelines and the Fed remains reluctant to hike rates, the euro and Japanese yen should continue to recover versus the greenback.

Bank Credit Analyst

Several tail risks appear less ominous compared to last month. Nonetheless, the earnings outlook has not improved and the FOMC will turn more hawkish ahead of the June meeting. Stay defensively positioned.

Bank Credit Analyst

Several tail risks appear less ominous compared to last month. Nonetheless, the earnings outlook has not improved and the FOMC will turn more hawkish ahead of the June meeting. Stay defensively positioned.

Monday's Special Report highlighted an overwhelmingly bullish macro backdrop for defensive sector relative performance. Health care is a key defensive component, but it has been hit hard in recent weeks, denting investor confidence. The main culprits behind the pullback have been the bounce in inflation expectations on the back of the dip in the U.S. dollar. The sector had rallied in lockstep with intensifying global deflationary pressures for the past few years, and it is only natural that it be used as a source of funds to lift exposure to cyclical sectors on the first whiff of financial stress relief. However, the path of least resistance for health care earnings is still up, in relative terms. Our Cyclical Macro Indicator is emitting bullish signals, supported by the resurgence in sector pricing power, particularly compared with moribund overall corporate sector selling price inflation. Importantly, valuation and technical factors also argue for a bullish reversal. Our relative valuation gauge is at an extremely undervalued level, while technical conditions are deeply oversold. These conditions are unlikely to last if relative forward earnings keep climbing, as we expect. Consequently, the reward/risk tradeoff is sufficiently upbeat to warrant adding the sector to our high-conviction overweight list.

Mixed data on housing turnover and new home prices have created some uncertainty surrounding the S&P homebuilders index over the past year, but we continue to see robust upside potential. Home prices are recovering after experiencing volatility in recent quarters, but not to the extent that affordability has been compromised. In fact, the Fed's dovish shift has helped push down long-term Treasury yields, further depressing mortgage rates and supporting housing affordability. The recent surge in lumber prices suggests that underlying construction activity is solid. Importantly, housing starts and real house prices remain well below prior cyclical peaks, underscoring that homebuilding companies should enjoy a prolonged period of decent growth. Moreover, the homeownership ratio has troughed, removing a major drag on the housing market. Any recovery in this ratio could turbo-charge housing demand. The implication is that homebuilders remain a core portfolio overweight. The ticker symbols for the stocks in this index are: DHI, LEN, PHM.

Bank Credit Analyst

Several tail risks appear less ominous compared to last month. Nonetheless, the earnings outlook has not improved and the FOMC will turn more hawkish ahead of the June meeting. Stay defensively positioned.

Risk assets are stuck in a range driven by the Fed feedback loop. But the current rally may continue for another quarter or two.

It is the perfect time to add protection, given the 13% rally in stocks over the past six weeks and the current steepness of the VIX term-structure.