Investment View Q1 2018
At the moment, the Bull market still seems to have some steam left to run its course. However, investors should be very prudent when central banks decide to become “silent” killers of liquidity.
We believe the withdrawal of liquidity (QT) by the Fed is so huge that it should negatively impact bond yields in USD. The ECB continues to have the dilemma of the huge economic Gap between Germany and the Peripheral economies. Despite this problem, we see Bund yields moving up as a result of USD yields moving higher and the ECB reducing QE.
Stock markets, especially the U.S. markets, may correct in the 1st half of 2018 should QT and higher bond yields become a burden to U.S. companies. This impact should be less severe in case growth rates of U.S. company earnings surprise on the upside.
The more prudent investors would be wise to build up more cash reserves and re-balance aggressive equity holdings. Longer term, we remain optimistic that equity holdings remain the investment of choice.