Emma Wall: Hello, and welcome to the Morningstar series, "Market Reaction." I'm Emma Wall and I'm joined today by State Street's Dwyfor Evans.

Hello, Dwyfor.

Dwyfor Evans: Hello, there.

Wall: So, the first half of the year has been rather marred by negative news, political, geopolitical. Can investors expect a brighter second half to 2018?

Evans: Probably not. A lot of the trends that we have seen on politics are going to be ongoing. The trades rhetoric has been in place for quite sometime now and the truth is, it's not going to go away anytime soon. What that inbuilds, of course, is an element of uncertainty in terms of how all this plays out from the American side, from the Chinese side, but also, there are other countries and other regions involved as well. So, difficult to see an end game there anytime soon and the uncertainty of that is clearly making investors a little bit more defensive at this particular point. So, the politics elsewhere, we think of something like the UK, for example, and we think the mid-term is coming up in the US as well. Maybe not having a direct impact on markets, but some of the political trends have kept some of the enthusiasm at the beginning of the year, I think, we are going to see the continuation of that through the second half as well.

Wall: Are there any bright spots? Are there any places where you are thinking actually growth is positive and indeed, stock markets look positive?

Evans: It's still the case that the US looks to be the standout here on a number of metrics. So, we are still very bullish on the US dollar. We think that one of the changes in the last six to nine months has been a move towards reestablishing the rate differentials as a factor that's driving currencies. And it's very clear that the Fed looks to be on some predetermined path towards monetary tightening. The jobs numbers that came out the other day are sufficiently strong to probably warrant that. There's talk, Canada, the UK, rate hikes. But again, it's at the margins. The US really does look to be in the middle of a hiking cycle. So, the dollar looks quite good here.

Look at earnings growth in the US is when you look at growth potential in the US, it does look to be on a different level, be it short-term because of the tax breaks. It does look to be on a different level to growth trends elsewhere. So, again, that probably gives US equities more of a boost than equity markets elsewhere. We actually do recommend at this point being slightly more defensive. But where we do see opportunities is really the US market and that's probably driven predominantly by what Trump's policies have been over the last six to nine months.

Wall: Now, before we began this interview, you mentioned that some people within the company had taken a more defensive stance. And as you reiterated there, that's the sort of thing that you are advocating at the moment. How do investors take that defensive stance? Because traditionally, it's been cash and gold. But cash in the past has not looked very attractive asset class?

Evans: No, but it's looking a little bit more attractive now given how yields are moving. So, the interesting point about the last few years – and we don't often see this, is that investors have tended to have been very pro-risk in terms of both equities and in terms of bonds. So, they have been getting into emerging market bonds, emerging market equities, high-yield bonds, et cetera, et cetera. In an environment where volatility rises, you have to rethink that strategy. And it's quite clear that investors are rethinking their strategies. So, part of what they may be doing is they may be reducing their exposure, particularly to global equities. There may be pockets of opportunities I mentioned in places like the US But generally, investors will be reducing their exposure to equities.

The natural safe haven home then is in bonds or in cash. But if they are already extremely exposed to the bond market, cash now becomes an option given where yields are. So, I think, we will see a shift into cash, a more pronounced shift than we have seen in recent years. And when we see a pickup in cash, it generally shows risk aversion. So, I wouldn't think of it in this instance as being necessarily a move towards risk aversion, more towards risk reduction and that's simply because investors have been very overweight to risk markets over the last couple of years.

Wall: Dwyfor, thank you very much.

Evans: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.