The firm’s managing director and co-head of multi-asset and head of US equity, Ron Temple, believed that increasing economic risks mean investors should be upgrading the quality of their equity holdings, while those in debt markets should take a more defensive approach until the risk/reward trade-off is more compelling.
Modest growth also contributed to Lazard’s recommendation that investors upgrade portfolios and focus on returns on capital and valuation, warning that while growth had been better than many believed, the market was currently in an “uncomfortable position” in this regard as the risk from protectionism regarding trade was underappreciated.
Looking at specific markets, in a global market outlook report, Temple wrote that the US was decelerating as expected, with trade conflict increasing risks to the market despite strong US labour markets enabling growth.
“Incremental uncertainty arising from the breakdown in US–China trade negotiations is challenging our previously optimistic outlook for growth,” he wrote. “We worry that the implications for consumer and business confidence will be more consequential than the tariffs themselves and might be underappreciated by equity investors. If tensions continue to escalate, we expect the Fed to take an even more cautious approach to monetary policy.”
In China, efforts to stimulate the economy were stabilising growth in line with the Government’s targets of six – 6.5 per cent, but still faced the risks inherent in policymaking for a two-tier economy, as well as the much-discussed concerns around US protectionism and also asset price bubbles.
Moving to Europe, Temple believed that the Eurozone’s growth appeared to have bottomed, but still remained fragile amid weak domestic demand and, like the rest of the developed world and China, threats from protectionism and politics. Weakness in industrial production, dating to a change in auto-emission standards, was also concerning in its persistence.
“We nonetheless expect solid, but modest growth through 2019, supported by the European Central Bank’s (ECB’s) accommodative policies. However, even this is not without risks, as a hawkish shift remains possible, depending on who replaces ECB President Mario Draghi at the end of October,” he wrote.
Finally, Temple’s assessment of Japan was that progress on reflating the national economy remained “painfully slow”, putting pressure on the Government to pass policies to blunt the impact of October’s consumption tax hike. The current shaky outlook had, however, also increased speculation that the tax increase could be delayed.
