Within equities, we prefer the US and Japan, expecting recent strong earnings and the success of ‘superstar’ firms to continue. We also allocate to India and other EM ex-China, seeing recent weakness in these markets as an opportunity to build exposure to the powerful longer-term structural themes that we have discussed. We are underweight the UK based on Brexit and general political uncertainty; we also expect sterling to perform well (which would weigh on UK stocks due to their high foreign currency exposure). For Canadian equities, we remain cautious with a neutral view. While the positive resolution of NAFTA is good for sentiment, Canada faces competitive challenges in addition to a significant household debt overhang. The absence of a fiscal response to recent US corporate tax cuts makes Canadian equities less attractive than US. Within global sectors we prefer financials (which should benefit from rising interest rates) and technology.
We are underweight government bonds across the board with the exception of Italy. While we expect the European project to face further challenges, we believe this will ultimately result in structural reform, and therefore see Italian bonds (that have priced in some euro break-up risk and concerns around the budget deficit) as attractive. It will, however, be a bumpy ride and exposure to Italian bonds should be limited and adjusted on a tactical basis.