22 June 2018
Economic expansion in extra time
History shows that stock markets tend to perform well as long as growth prospects remain intact.
In this regard, the US expansion is now playing extra time. With tax cuts expected to add nearly 0.7% to GDP growth in 2018 and 2019, the economic expansion continues.
Moreover, a better job market and a slight decline in oil prices will allow the European economy to continue to grow at a moderate pace, while the Chinese authorities seem to generate another "soft landing" of their economy.
This global picture, in itself still positive, does not prevent some dangers which, even if they do not kill the economic recovery, could generate a higher volatility.
Watch the analysis of Peter Vanden Houte, Chief economist at ING Belgium
Financial markets: equities and small caps have still some potential
The stock market’s ability to shrug off trade or political headlines and volatility is reasonable to assume as long as corporate earnings stay strong and as long as the adjustment of interest rates occurs gradually and real rates remain lower than the real growth rate.
We still believe that prospects of sustained growth should boost earnings across cyclical sectors, especially amongst Technology and Commodities which have a strong positive relationship with moderately rising rates since 2000.
On the regional level, we stay overweight on Euro-Area stocks (excluding Italy), as Eurosceptic and populist demonstrations may actually play into European earnings later in the year and into 2019 if the euro continues to lose steam.
We see much better potential in smaller companies that do business mostly in their home markets and are therefore less exposed to the geopolitical and trade risks pressuring others that rely more heavily on overseas markets.
Watch the analysis of Steven Vandepitte, investment office expert at ING Belgium