Deniz ÖZDEMIR, M.Sc.
- Authorized Agent
- Wealth Management
Developments in politics and the economy have demanded a strong set of nerves in recent weeks. Global equity markets underwent a moderately severe correction, with the U.S. market (S&P 500) falling more than 5% below its early September peak.
Investor concerns were fuelled by several risk factors. These included ongoing supply disruptions and rapidly rising energy prices, which translated into increasing inflation expectations. In addition, growth was weaker than expected, even raising the issue of stagflation again. Speculation about a throttling of bond purchases by the U.S. Federal Reserve, debates about the U.S. debt ceiling and uncertainties about China also weighed on sentiment.
Although markets are increasingly pricing in these risks, we have decided to hold off on an initial tactical increase in equity exposure for the time being, as we recognize the risks listed above.
In fixed income, we maintain our strong underweight for government bonds, as bond yields are likely to rise further as the economy continues to recover. In contrast, we clearly favour corporate bonds, emerging market bonds and convertibles.
In currencies, given the weakness in China, we reduce our view on the basket of emerging market currencies from Attractive to Neutral, as the CNY represents a high proportion of the this basket.
In the following, we explain our views on the most important asset classes, starting with a tabular overview of our current tactical positioning.
In the following table, we present our view on the most important asset classes:
|very unattractive||unattractive||neutral||attractive||very attractive|
|Global Fixed Income|
|Corporate IG Bds|
|High Yield Bds|
|Emerging Market Bds|
|Emerging Market Eq.|
|Foreign Exchange Rate|
|Emerging M. CCY|
The terms attractive / unattractive describe the return potential of the various asset classes. An asset class is considered attractive if its expected return is above the local cash rate. It is considered unattractive if the expected return is negative Very attractive / very unattractive denote the highest conviction views of the BENDURA Investment Committee. The time horizon for these views is 3 - 6 months.
Continued fiscal support, vaccine rollouts and reopening of economies in many regions will continue to bolster the expected economic rebound. As a consequence, long-term global yields should be supported.
With inflation being more elevated, market expectations for central bank reactions have picked up somewhat, and the first developed market central banks have already begun hiking rates. The Fed has signalled to start tapering soon, though this is already reflected in market prices by now.
We reiterate our preference for short-duration strategies in the Eurozone and Switzerland. The UK yield curve has repriced sharply across maturities due to a change in central bank expectations, which has led us to prefer a short duration view there too. In the USA, we still prefer the mid-term segment (5-year range) with a slight tilt toward shorter maturities given US yields are already considerably higher than at the beginning of the year.
We maintain our neutral outlook on global IG given the still expensive credit spread, and fears of higher government yields and further tightening by central banks.
We view risks to the downside outweighing the potential for further tightening, against the backdrop of Fed tapering/liquidity reduction.
We retain our neutral view on High Yield bonds. Within HY-bonds, we continue to favor Coco-Bonds due to our pro-cyclical bullish view on the financial sector.
EM hard currency bond spreads have widened significantly in September. In light of potential tapering and rising US rates, the risk-reward for EM HC bonds does not look appealing, even though valuations have improved.
The technical picture has deteriorated again. Inflows into EM bond funds have reversed sharply in the second half of September, as a wider benchmark spread and rising US Treasury rates volatility has caused outflows.
The fundamental picture has not changed materially. Inflation remains a near-term risk, but most EM central banks have adjusted policies to mitigate the impact of price pressures on inflation expectations.
Selected Fixed Income Indices, YTD. Source: Bloomberg
We believe that the global economy will continue to grow and that conditions have improved for an initial cautious tactical increase in equity exposure. The recent negative surprises in industrial production should soon be followed by an acceleration, while private sector finances in the U.S. and Europe are solid. Together with very low inventories that need to be replenished, this points to continued strong demand. Given the supply-side bottlenecks, it will take longer for inflation to come down. Nevertheless, we see the current elevated levels as temporary. Financing conditions remain favorable and central banks should continue to provide favorable liquidity conditions, although they may announce limited tightening measures.
Key risks to global equities are the ongoing supply disruptions and surging energy inflation, as reflected in rising inflation expectations; weaker-than-expected growth, which even caused a reappearance of the stagflation theme; a restrictive turn in monetary and fiscal policy; and regulatory and political developments (e.g. uncertainties over China). Other risks for global equities include a slump in earnings (expectations) and COVID-19-related developments such as further mutations or delays in the vaccination progress.
Despite the improving economic momentum, our investment committee has decided to keep the equity weighting at neutral for the time being due to the increased tail risks.
We now expect developed market equities to outperform global equities and have a preference for the UK, Germany.
UK equities offer an attractive valuation coupled with an appealing dividend cushion, and also benefits from favorable sector composition. German equities offer further rebound potential, as the market’s cyclicality comes with some quality.
In sectors, we have a preference for materials and financials, while utilities, consumer staples and listed real estate are least preferred. Materials offer appealing fundamentals and should benefit from infrastructure investments. Financials offer further catch-up potential, as they are still attractively valued and should be a major beneficiary of an economic re-acceleration and once yields pick up again.
We continue to expect attractive returns from emerging market (EM) equities driven by the solid earnings picture. However, we keep allocation at strategic levels in a portfolio context as the heavyweight Chinese market has continued to suffer as regulatory measures are hurting private businesses. Despite weakness in China, the overall global economic recovery should remain strong, which supports EM equities.
We continue to expect EM Asia to outperform global EM, given its strong fundamentals, exposure to chip manufacturing and sensitivity to pick-up in global trade. EM Asia continues to offer structural growth and diversified exposure with sensitivity to global trade and recovery.
Selected Equity Indices, YTD. Source: Bloomberg
The US Dollar Index (DXY) strengthened over the course of last month. A stronger US labor market recovery, less concern on the pandemic impact, and more specific Fed guidance on tapering have supported the move.
The less accommodative Fed policy stance has built support for the USD from a carry perspective and provides some upside potential for the USD, and low yielding currencies may be increasingly used as funding currencies. We have therefore turned positive on USD/JPY and on USD/CHF.
Given accelerating Eurozone inflation and the EUR’s risk beta, we remain neutral on EUR/USD, which implies positive EUR views against the CHF and JPY.
Overall, we remain neutral on the DXY. We continue to like commodity-exposed high beta currencies such as the CAD, NZD, and NOK, which are also supported by the recent central bank rate hikes in Norway and New Zealand.
We neutralize our attractive absolute view on EM FX, mainly due to a new range-bound view on the CNY.
While economic activity in EM is still recovering, a more cautious growth outlook for China could also mean a headwind for EM growth in general.
Hawkish monetary policy in some EM countries has been a supportive buffer for EM FX. However, the hiking cycle will likely slow down over coming months.
In light of a more constructive US Fed stance, we expect currencies with solid fundamentals and still elevated carry to remain resilient.
The RUB is our preferred currency, while we hold a negative view on the MYR and MXN.
EURUSD Rate, YTD. Source: Bloomberg