Barometer: Outlook for US and Emerging Markets Stocks Remains Strong

As the skies clear, investors can refocus on a landscape characterized, overall, by positive fundamentals: ample global liquidity, solid corporate earnings momentum, stable though unspectacular economic growth, mild inflation (despite risks of increase), and more attractive valuations than two months ago for many asset classes. Given all this, we are more comfortable taking a moderately risk-friendly stance by adding exposure to emerging market assets, US equities, and industrial sectors.

However, we maintain a selective risk allocation: we aim to avoid depending on a single macroeconomic or geopolitical development. Therefore, we retain an overall neutral allocation in equities, bonds, and cash.

Our leading economic indicators support this view and suggest a moderately positive macroeconomic backdrop for the world as a whole. The main message from the leading indicators we monitor is that economic activity remains largely resilient in most developed economies and much of Asia. The energy shock transmission that is emerging remains limited so far outside of surveys and price indicators. Our base scenario still forecasts global economic growth of 2.8% this year, slightly above potential, while inflation averages around 3%.

That being said, the risks point towards lower growth and higher price pressures. Indeed, if the closure of the Strait of Hormuz extends into the summer, it could trigger a severe recession in Europe and some emerging economies, or even in the United States. As long as this maritime passage remains closed, oil prices fluctuate between $110 and $120 per barrel, compared to levels around $70 before the war and a long-term fair value of $80 according to our model (see Fig. 2).

Rising oil prices create winners and losers. Emerging economies are relatively resilient. Energy exporters are clear beneficiaries, but other countries are also in a stronger position than during previous shocks, thanks to better economic growth, lower external vulnerability, and the buffering effect provided by relatively higher interest rates.

In the United States, the situation is more balanced. The American consumer is likely more fragile than overall growth indicates: consumption figures are already weak, disposable income growth has significantly slowed down, consumer confidence is near historic lows, and rising oil prices are expected to further reduce real incomes. Nevertheless, spectacular windfalls are on the horizon for the country’s oil producers, which will offset the overall impact on the economy.

Conversely, in Europe, the oil shock is clearly negative. Expectations for a recovery are fading, and stagflation poses an imminent threat. We have lowered our growth forecast in the Eurozone for the year to 0.9% (from 1.3% two months ago) and raised our inflation forecast to 2.7% (from 2.0%).

Context: The article discusses the current economic landscape in terms of global liquidity, corporate earnings, economic growth, inflation, and asset valuations, highlighting the risks and opportunities in different regions of the world.

Fact Check: The closure of the Strait of Hormuz, a key oil shipping route, could have significant economic implications globally, impacting oil prices, economic growth, and inflation rates.