In the past days and weeks, we communicated a number of rating changes that point to an overall lower risk exposure within the equity asset class, such as the downgrade of European equities to neutral or becoming neutral within the investment styles large/small caps, quality and beta. We are therefore not altering the previous calls but are merely withdrawing to a neutral stance. These rating changes are also in harmony with our assessment outlined in earlier publications that we believe that the investment cycle is becoming mature. In terms of regional exposure - also on an investment style level - it can be stated that currently investors are more risk-cautious in Europe compared with the US. It is important to note that we are not becoming bearish on equity market investments given the ongoing outperformance compared with other asset classes. We still believe that missing investment alternatives in other asset classes remain an argument in favour of fairly valued equity markets.
Conclusion: comparing cross-asset performance still suggests that equities remain an attractive asset class. Recent rating changes point to lower risk exposure within the asset class.
715 out of 995 or 72% of companies in emerging markets have reported their Q2 sales and earnings figures. Overall results have only marginally changed since our last update. Worth mentioning is the decline in EPS surprises from -0.5% to -1.3%. Nevertheless, emerging market companies have still largely met analyst’s expectations. Next week will be decisive since all remaining Chinese companies will have reported their results end of August. This adds another 170 companies and will allow drawing a final conclusion on the Q2 earnings season.
The analysis of the 147 Chinese companies that have already reported is encouraging. Although sales surprises are down -6.4%, EPS surprises are meeting expectations and are flat with -0.3%. On a year-on-year basis, Chinese companies are delivering again and sales growth has increased by 10.3% while EPS growth has grown by 4.7%.
Conclusion: the Q2 earnings season has met analyst’s expectations so far. A final conclusion can be drawn end of next week when the remaining 170 Chinese companies will have reported.
The August Ifo business climate index fell for the fourth consecutive time. The drop to 106.3 from 108.0 July was weaker than expected and confirms that the slowing growth dynamics of the German industry will persist over the next few months. In fact, three consistent signals in a row are already sufficient to indicate a statistically robust trend. Current conditions fell to 111.1 down from 112.9 in July, but remain at solid levels. However, business expectations declined markedly to 101.7 from 103.4, signalling downside risk to our H2 GDP growth forecast. Despite a larger-than-expected decline in Germany’s Ifo business confidence survey European equities had quite a good run, nonetheless weak data should keep EUR and rates under pressure. The market appears to be pricing a rising probability of further action by ECB.
Conclusion: overall, the soft readings of the August Ifo business index survey signal downside risk to our H2 GDP growth forecast.
Natural gas prices gained 2.5% yesterday with support partially coming from forecasts indicating hotter-than-usual weather over the coming days in the southern and eastern parts of the United States. Thanks to mild summer weather and robustly growing production natural gas storage levels have normalised but still remain in seasonal deficit. The market remains prone to weather risks and could enter the approaching winter heating season with uncomfortably short supplies. The hurricane season has been rather quiet so far. Although tropical storm Cristobal, only the third Atlantic system this year, has strengthened to hurricane status it poses little threat to the US mainland. We see upside to prices from current levels and initiate a trade recommendation to go long US natural gas futures.
Bullish factors include that the market is increasingly likely to enter the approaching winter heating season in deficit, that infrastructure bottlenecks should slow production growth in the near term and that sentiment has recently dropped to rather bearish levels.
Conclusion: the natural gas market looks increasingly likely to enter the coming winter heating season in deficit. We see upside to prices in the near term and recommend going long US natural gas futures not least due to looming weather risks.