Global equities outlook ‘far from gloomy’

The last few weeks for global markets have been "one damned thing after another" (as Arnold Toynbee described how some view history). No sooner had the problems of European sovereign debt and the US debt ceiling been cleaned up (or, perhaps we should say, swept under the carpet for a few months), than investors started to fret about the sharp deterioration in global economic indicators. Global equities have corrected by 6% over the past two weeks, with only the US (just) in positive territory for the year to date.

How much should investors worry about this lurch down? US data has weakened sharply in recent weeks, with HSBC's Surprise Index showing the soft patch to be even softer than last year's. Our economists this week cut their forecasts for US growth to 1.8% for this year (from 2.5%) and 2.5% next year (from 2.9%).

But our recent trips to US, Europe and Asia suggest that most investors took risk off the table back in April and are already cautiously positioned. While the economic outlook is uninspiring, our economists are not forecasting a recession and, indeed, are looking for US growth to accelerate in the second half. A lower oil price should help.

We are happy to stand by the view we took in our Quarterly, published 6 July, where we argued that, while markets "may have a little further to fall ... . the longer-term picture for equities is far from gloomy." In particular, earnings growth remains strong (with 71% of US companies so far beating expectations in Q2). Meanwhile, the global PE has been cheaper (since 1988) only for six months in late 2008-early 2009. We, therefore, stick to our recommendation that investors should look to raise equity risk gradually over the summer.