Outlook Q3 2015 (BCA)

BCA Research has hosted yesterday a webcast and focused on two hot spots of the global economy:

• China: The meltdown of equity prices in the past weeks was dramatic, but stabilized in the last few days and, the market is still up 44% year to date.
  
  Shenzhen Stock Exchange A Shares (ThomsonReuters)
  
  Only a small percentage of the population is invested in the stock market, so the influence on the real economy will be negligible. However, the economy is slowing down because of sinking exports, which is bad for commodity and energy exporters elsewhere. Moreover, commodity exporters are suffering from increased production capacity globally. Thus, stay underweight emerging markets, commodity/energy producers, and other importers to China.
• Greece / Europe: The impact of the Greek economy is of no importance to Europe and much less globally. The real question is: Is Greece an outlier or an omen for bigger problems in the Euro area. So far facts are inconclusive: On the one hand, only Greece suffered a depression and a contraction of nominal GDP of 25% in the last 5 years, which could lead to the conclusion that the tragedy in Greece is an exemption in Europe. On the other hand, one could argue that the high debt in Italy will depress Italy's future growth, because of the austerity measures that will be implemented to bring down debt. With Italy's size this would pose an existential threat to the Euro.

Implication for Asset Allocation:
Small overweight of stocks relative to bonds, and favor developed markets over emerging markets. US equties are expensive relative to European and Japanese stocks. Although Japanese stocks profited from the yen devaluation, the are heavily exposed to China. Furthermore, stay overweight defensives vs. cyclicals because global growth is slowing.