Caution required ahead of UK referendum

17 May 2016
  • Changes to our asset allocation: We confirm our overall prudent strategy with an underweight in equities and our positive view on credit despite tighter spreads. The near-term outlook for Japanese equities has worsened as the Bank of Japan refrained from easing policy further. We therefore suggest an outright underweight.

  • The defensive nature of Wall Street combined with the prospects of better earnings in the second quarter offers rays of hope for the US market which we raise back to neutral.

  • Near-term economic prospects have brightened in the US and China after a soft start to the year. Conversely, the euro area manufacturing sector feels the headwinds of a stronger euro and of a weak banking sector.

  • The EU referendum in the UK remains too close to call. Given the potentially severe impact on the UK economy of a Brexit and potential market turbulences, we think it is worth hedging positions and postpone decisions to invest in risk assets until the day after.

  • We expect the Fed to hike interest rates in July. This is a close call given the dovishness of some prominent members of the FOMC. Yet, as the US economy continues its gradual recovery and domestic wages steadily pick up, we think a majority in favour of action should emerge. This should help the US dollar to appreciate against other major currencies.