Risky assets have recently been helped by the US macro situation continuing to improve and a very strong Q2 reporting season. However, behind the surface there has been some interesting developments that might indicate that investors are becoming slightly more risk averse. The rest of the world has fared worse than the US, with the MSCI World excluding the US actually falling slightly since the first issue of Nordea View in mid-May. Also, during 2018 credit spreads have widened and emerging markets underperformed, and over summer defensives have outperformed cyclicals, low-risk stocks strongly outperformed riskier ones and small caps lost out to large caps.
The most crucial macro development for risky assets during the coming months will, in our view, be if US leading indicators, such as ISM, starts falling or not. We believe they will fall and drag stock markets down in the process.
We stick to our negative stance towards risky assets, due to the global manufacturing slowdown that is already upon us, our expectation that leading US indicators should drop, and the worsening central bank liquidity conditions. In light of this and rising wage pressure, we find profit margin expectations for 2019 too high.
Chart1. Valuations are stretched
Chart 2. ISM should drop the coming six months