The main points of the allocation meeting
- Tensions between Iran and the United States escalated on Monday, but the ceasefire between the countries remains in place. U.S. armed Forces secured the passage of two American vessels through the Strait of Hormuz while Iran attempted to block this by force. Iran also carried out strikes against the United Arab Emirates. Both Iran and the United States continue to maintain the closure of the Strait of Hormuz, as it serves as a pressure tactic for both sides. The U.S. blockade of Iranian ports is preventing Iran’s oil exports on which the Iranian economy heavily depends. The war is likely to accelerate inflation and slow economic growth, particularly in Europe.
- First quarter earnings growth has been very strong in the United States and emerging markets. Earnings growth for companies in the S&P 500 index stands at 16 percent, while earnings growth in the MSCI EM index is 38 percent and in the STOXX Europe 600 index 5 percent, with around half of the companies in the indices having reported their results so far. Technology companies are driving earnings growth in both the United States and emerging markets. In emerging markets, earnings growth has been particularly strong in Korea and Taiwan, driven by semiconductor companies SK Hynix, Samsung, and TSMC. In Europe, earnings growth has been strongest in the energy sector, where it stands at 24 percent.
- Major U.S. cloud companies Amazon, Alphabet, Meta, and Microsoft, which reported earnings last Wednesday, delivered average revenue growth of more than 20 percent. Artificial intelligence continues to be the main driver of growth. The companies also communicated large investment plans, and the largest U.S. cloud companies are collectively expected to spend more than 750 billion dollars on investments this year, more than 80 percent higher than last year. Analysts believe this year could deliver the fastest earnings growth in many years, driven primarily by technology companies.
- Equity markets have risen despite the Iran war. Brent crude oil prices are around 100 dollars per barrel, compared with around 75 dollars per barrel before the war began. Global equity markets rose in April despite uncertainty related to the Iran war. In euro terms, equity markets returned around 9 percent in the United States, 6 percent in Europe, and approximately 13 percent in emerging markets during April. Returns have been supported particularly by the technology sector. Long-term interest rates, however, did not decline in April. The yield on the U.S. 10-year Treasury bond stood at 4.33 percent at the beginning of April and has now risen to 4.45 percent. The European Central Bank (ECB) has communicated that it will raise deposit rates, while the Federal Reserve has not signaled rate hikes.
- We overweight equities and underweight money markets. Within equities, we overweight EM equities and remain neutral elsewhere. Within equity themes, we emphasize European industrials. In fixed income investments, we overweight high yield corporate bonds and underweight government bonds and remain neutral on emerging market bonds and investment grade corporate bonds.
