Economic weakness to continue to weigh on equities

The recent sell-off in global equity markets has hit the euro-zone harder than the US, but we doubt that this will continue. Equities in Germany have performed particularly poorly, which is unsurprising given that the economy is struggling – with GDP growth very weak in Q2 and surveys for July weakening further – and that it is highly dependent on world trade and therefore exposed to the trade war. We expect equity prices in advanced economies to fall further this year, largely because we expect US GDP growth to slow and investors’ risk appetite to wane. But equities probably won’t fall as far in the euro-zone as in the US, for three key reasons. First, we suspect that the euro will weaken against the dollar. Second, there is more scope for growth to undershoot expectations in the US than the euro-zone. And third, investors appear to have got ahead of themselves in expecting rapid rate cuts by the Fed. The upshot is that we expect euro-zone equity indices, such as the German DAX, to fall less far than the S&P 500.