For the next 6 months, invest for higher rates, expect protectionism to worsen

Global growth in the first half of the year has been somewhat weaker than expected. We saw growth slowing much more than we anticipated, the US dollar weakening, bond yields falling.

In the second half of 2017, we anticipate a moderate global growth, albeit at a slightly slower pace than that registered in the first half.

Somewhat perplexingly, global inflation dynamics continue to print below consensus estimates, but we see this weakness as temporary and believe major central banks will start to normalise monetary policy over the course of the next two years.

In emerging markets, we note economic activity is softening slightly, particularly in Asia. Importantly, we expect China’s growth to moderate in the third quarter, following two upbeat quarters, not least due to spillovers from recent regulatory and monetary tightening measures.

The financial markets mirror this generally positive backdrop, with equities off to a solid start to the year. But as global growth synchronises, markets are starting to worry about higher interest rates with fixed income markets around the world flashing warning signs in the form of sharply higher long term bond yields.

For now though, earnings rather than expectations of future interest rates will likely guide equities. But the problem is that the growth expectations in per-share earnings over the next 12 months remain too optimistic, in our view. Additionally, valuations have become expensive since the rally and technical indicators have turned neutral, but low volatility and ample liquidity remain supportive. Overall, with macro momentum slowing and the US Federal Reserve on a tightening path, equities are likely to consolidate at current levels.