Spotlight on the ECB, EU stocks, UK Budget and overlooked markets

Published on 4 March 2024

Supriya Menon, head of multi-asset strategy EMEA at Wellington Management.

Supriya Menon, head of multi-asset strategy for Europe, the Middle East, and Africa at Wellington Management, discusses how she will be approaching the upcoming week, including how she’ll be preparing for the eagerly anticipated European Central Bank (ECB) interest rate decision on March 7 and dissecting any signals the bank provides on this year’s rate path.

European stocks have had an exceptional run since mid-February and Menon unpacks her view on the region, where she’s awaiting signals and when trading desks should be poised and ready to react.

In this episode, the EMEA head of multi-asset strategy also provides insights on how fiscal policy is shaping her investment outlook—particularly with the UK Budget expected to be published on March 6—and where she sees huge opportunities in other markets and regions.

North America: Weekly Review and Outlook on Markets

  • Last week, US equities volumes were low for the year to date and liquidity was poor in February compared to January.
  • Last week, US investment-grade volumes saw a bumper week with high volumes and liquidity was good.
  • This week’s data: US ISM Services on March 5, Canada’s Interest Rate Decision on March 6 and US Non Farm Payrolls on March 8.
  • This week in primary equities: There are 6 IPOs expected to price at $66.6 million. The largest deal should be SolarJuice Co. which is seeking $18.8 million.

Europe: Weekly Review and Outlook on Markets

  • Last week, European equities volumes surged week on week but liquidity appeared poor.
  • Last week, Euro Investment-grade volumes climbed week on week but liquidity is good relative to the year-to-date average.
  • This week’s data: ECB’s interest rate decision on March 7, EU’s Unemployment Rate and GDP Growth on March 8.
  • This week in primary equities: 0 IPOs are expected to price on European exchanges this week

Interview Transcript:

Jo Gallagher What are some of the main themes that you’ll be focusing on this week, and what will be impacting liquidity and markets?

Supriya Menon It’s going to be a really interesting week ahead, Jo, and we’re looking for some signal to come out of the ECB meeting that is this week. We’re not looking for a move just yet, but we’re going to get some signals about the likely rate path from here. And that’s going to be really important, not just for the rate markets, but also to set the tone for risk, because we get a whole bunch of other central bank (decisions) in the weeks ahead.

The other thing I’ll be watching is really information about global economic activity. We’re getting a series of PMI data points and PMI is our, of course, global activity indicators. And we’re looking for manufacturing activity to continue to move upwards.

Services have been strong but we’re looking for the global manufacturing cycle to continue to improve. And that will mean that in my portfolios, the fact that I’m positive on risk assets for both equities and credit, I will continue to be so because I’m getting more of that uplift in global economic activity coming through.

Jo Gallagher EU stocks made significant gains last week. Are you starting to see some positive signs out of Europe? And if so, how are you approaching us?

Supriya Menon So Europe is an interesting one Jo. Your viewers might be surprised to know that the Euro Stoxx 50 has actually outperformed the Nasdaq for the year to date. So there’s been a little bit of a stealth outperformance here. Whether that continues or not depends on a couple of things.

Many of these companies are, you know, quite externally focused, driving quite a bit of their revenues from other regions globally. So an improvement in global growth will be supportive. Also, we have had continued improvement in economic surprises in the data in Europe. And that’s from a point of relatively low valuation for European equities.

In order to turn more positive on European equities, though, as a signal to perhaps become more pro-Europe relative to other Indices, I’d be looking for an improvement in earnings momentum. So looking to see if that early improvement in economic momentum actually translates to earnings.

Jo Gallagher We’ll also have the UK budget out this week. How much is the fiscal policy in the UK and globally impacting your investment outlook?

Supriya Menon Fiscal policy was a significant factor in the resilience of the global economy last year, and many of us had underestimated how important it was. Now, looking forward, we’re still looking for fiscal policy to be expansionary, in general.

We have the likelihood of tax cuts in the UK, although much of that could be financed by increased receipts. But the point is we are going through a bit of an economic expansion and at the same time you have growth cyclical, fiscal policy.

Now this makes central bank jobs much harder to navigate the period where you have expansionary or relatively expansionary fiscal, and you’re looking for those rate cuts to come through. So it might introduce some uncertainty in kind of the number and pace of those rate cuts, whether that’s, you know, in the US or in the UK. So we’re looking for fiscal policy to really also inform how we think about monetary policy and central bank reaction functions from here.

Jo Gallagher Turning to APAC, Japanese stocks continue to hit record highs. Is there more room for this rally to run?

Supriya Menon We’ve had a high conviction overweight on Japanese equities for more than a year now. And while we’ve, you know, challenged that ourselves, actually we believe that the runway for outperformance is quite a long one here. So we’d stick to our call for outperformance of Japanese equities.

Now this is because you have this confluence of top-down and bottom-up factors which are supported for that market. You have supportive fiscal and monetary policy, and this is notwithstanding the fact that, you know, the Bank of Japan meets in a couple of weeks, and might move away from its negative interest rate policy. Still, you know, real interest rates are super low and unlikely to be that way in Japan. And meanwhile, you continue to get strong profitability across a range of Japanese equity sectors. And while the market is no longer cheap, it isn’t expensive either.

So we continue to see corporate governance improvements coming through. Profits continue to be well supported and that market continue to outperform. So we remain positive. And the other thing I’d say, Jo, just as a wider point, is that you’ve had this period where, you know, sort of global risk assets have done relatively well, and we have a pro-risk stance in the portfolio that I run.

But it’s important to also consider looking at some of the more unloved parts of the market. Now, Japan until recently has been one of those. But I’d also draw your attention to areas like value or small caps. Those might become interesting as the breadth of the market improves from here.

Jo Gallagher Thank you, Supriya for your insights and thank you for watching. This is been Trader TV This week.

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