企業利益

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.

The RMB has moderated considerably since mid-last year, which should lead to improved capacity utilization and easing PPI deflation. There is a strengthening case for an upswing in China's profit cycle, driven by falling interest rates and a weaker RMB, while investors are ill-prepared for any positive earnings surprises.

The rally in risk assets could persist. Dollar and oil moves are not yet exhausted. But valuations and poor earnings quality warrant a cautious approach.

A dovish Fed bought the bounce a bit more time, but there is little incentive to add portfolio risk. Buy consumer finance, especially vs. banks, and expect communications equipment outperformance.

While the FOMC was more dovish than expected, rising inflation may cause the Fed to escalate hawkish rhetoric. The bounce in oil should help high-beta stocks. Underweight U.S. equities versus Europe, Japan and H-shares. We estimate U.S. equities will deliver returns of 4%, ann. over the next 10 years, <i>vis-à-vis</i>  9% for the euro area and Japan, and 14% for H-shares. Central banks have more options to combat any possible debt-deflation spiral in Europe/Japan/China than is often recognized.

If the EM rally is sustained, the Fed will once again become resolute in its commitment to hiking interest rates. This in turn will spur another relapse in EM risk assets. Chinese policymakers are attempting to juggle contradictory objectives without a clear and realistic plan of action to resolve existing problems.

Confirming indicators still do not validate the oversold rally. Fade the materials sector bounce, by selling steel down to underweight.

Are the arguments for overweighting European equities still valid? If so, overweighting relative to what?

The recent rebound is not a harbinger of a prolonged recovery in risk assets. The many potential negatives will keep volatility high and trigger further occasional selloffs.