ASSET allocation insights September 2016
YOUR MONTHLY “RENDEZ-VOUS” WITH THE MULTI-ASSET TEAM HIGHLIGHTS •• Data released in July confirmed the rebound we witnessed in June in the US economy, removing for now the short-term threat of a pronounced slowdown in the world’s largest economy. Besides a few exceptions, most of the global economy is growing at a decent rate, albeit not strongly. In the emerging world, we are also seeing improving trends in some of the weak links of recent years. •• September may be an inflexion point to recent market trends : we don’t expect a strong reversal of these trends but just some pause. In this context, the dollar may stop weakening, rates should grind marginally higher, spreads shouldn’t tighten further and emerging markets outperformance could be challenged. •• The strong performance of gold since January was driven by risk aversion at the beginning of the year and by the sharp fall in real yields, given the Federal Reserve’s wait and see mode since then. Going forward, as the Federal Reserve starts reassessing their monetary stance, risk aversion is most likely driven by rising real yields. In such a scenario gold will most likely come under pressure as well.
Global risk sentiment Risk taker
Asset class preference Equity
Government Bonds
Risk adverse
Fabrizio Quirighetti
Hartwig Kos
Adrien Pichoud
Chief Investment Officer Co-Head of Multi-Asset
Vice-Chief Investment Officer Co-Head of Multi-Asset
Chief Economist
The last sip at the Fed’s punch bowl So far, so good! Since mid-February, recession fears have receded, oil prices have stabilized, emerging market economies have bottomed out and risky assets have performed well – surprisingly for most of us. Forget about valuation levels and geopolitical risks as very loose monetary policy has pushed prices up. While this has served to postpone or reduce deflationary pressures, it has failed (once again) to reflate the economy. In other words, the many troubles and concerns haven’t really disappeared, they have just been drowned again in the Fed’s massive punch bowl. As a result, we believe the Fed’s intentions are still the main market risk and driver. It is a chicken and egg situation : market expectations about the US’s monetary policy path makes it quite challenging for the Fed to actually normalise rates without automatically triggering the uncertainty that would in turn require easing back. Fortunately, talk is cheap and we suspect Fed members will use rhetoric to ease/tighten at the margin, or at least restore some uncertainty regarding their intentions. Given the current strong consensus on an overall dovish stance by the main central banks, a few positive US economic data, especially on the labour market, wages or inflation, may be enough to engender a re-pricing of assets resulting from a more hawkish Fed. If we are right, it means that September may be an inflexion point to recent market trends : we don’t expect a strong reversal of these trends but just some pause. In this context, the dollar may stop weakening, rates should grind marginally higher, spreads shouldn’t tighten further and emerging markets outperformance could be challenged. While we are keeping an overall mild preference for risk, we are reallocating our preferences within our asset classes in order to benefit from a last sip at the Fed’s punch bowl. The strategy is to concentrate our risk budget in European equities (especially banks), HY short duration bonds and emerging market local currency debt, where there is still some upside potential, and to reduce current asymmetrical risk-reward assets such as US equities, IG credit, emerging market hard currency bonds or gold as these still carry some risks but haven’t any significant upward potential left based on our economic scenario and asset valuation analysis. This risk reshuffling, which consists of selling/reducing the most expensive “risky” assets and marginally reallocating towards less expensive ones, may be seen in the same vein of last month’s recommendation to buy cheap protection while keeping the overall portfolios’ risk stance unchanged. This should help us to smooth the transition towards the end of this current party as the music volume has already been turned down somewhat and the punch bowl may soon be taken away. At least temporarily.
Fabrizio Quirighetti Credit
Chief Investment Officer Co-Head of Multi-Asset
1 SYZ Asset Management (Suisse) SA info.syzam@syzgroup.com
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