LGT Asset Allocation for Q1/2016 Mittwoch, 16. Dezember 2015 - 15:25
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LGT Asset Allocation for Q1/2016
Our outlook for the developed economies remains quite benign, aided by the continued weakness in commodity prices. But, rightly or wrongly, concerns about the emerging world linger on, equity valuations are not generally low, and public markets have lost upward momentum. In fact, the only clear fundamental improvement we see concerns the Japanese yen, which we decided to buy. Overall, we have further derisked our portfolios, resulting in a larger cash position.
Please find below the market comment by Mikio Kumada, CIIA, Global Strategist at LGT Capital Partners, and Boris Pavlu, Investment Analyst at LGT Capital Partners:
- Photo Mikio Kumada (JPG)
For more information please contact:
Roland Cecchetto or Kim Ghilardi Communicators roland.cecchetto@communicators.ch
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LGT Asset Allocation for Q1/2016
Our outlook for the developed economies remains quite benign, aided by the continued weakness in commodity prices. But, rightly or wrongly, concerns about the emerging world linger on, equity valuations are not generally low, and public markets have lost upward momentum. In fact, the only clear fundamental improvement we see concerns the Japanese yen, which we decided to buy. Overall, we have further derisked our portfolios, resulting in a larger cash position.
Macroeconomic baseline scenario: modest economic growth to continue Heading into 2016, we expect further modest growth for the global economy, while inflation will still remain tame, contained by debt deleveraging in some economies, soft commodity prices, and the slowdown in the emerging markets.
Nevertheless, we could see a modest pick-up in broader consumer prices next year. The energy price slump’s negative year-on-year effect on the inflation indices will fade, and there are signs of domestically-driven gains in wages in some major markets, such as the US and Japan. These tentative uptrends explain why the US Federal Reserve is eager to - finally - start normalizing monetary policy. To a lesser degree, they also explain why the Bank of Japan might rely less on continuously expanding monetary stimulus going forward (also see currency section below).
Admittedly, our baseline scenario is broadly in line with the consensus global view in the financial industry, which requires some critical self-monitoring. However, the industry consensus is much less uniform when it comes to the risk scenarios - i.e. the alternative paths that are not likely, but possible. Our risk scenario for the coming months envisions recurring fears of a global descent into a deflationary recession. That outcome could be triggered by number of adverse developments, ranging from a nasty credit crunch in China and/or other emerging economies, to an unexpected economic slowdown in the US (i.e. one that is caused by layoffs in the shale oil and gas sector, rather than the usual bad winter weather).
Equities: constructive outlook, but with increasing bouts of volatility Our assessment of future equity returns is cautiously optimistic. Longterm uptrends are intact and economic policies remain largely supportive. However, some analytical methods point to a continued erosion of underlying structural strength. Market breadth, or the number of individual companies that are participating in the broader bull market, is lacking (small and midcap shares are underperforming large caps in the US, for instance), while valuations in some markets, such as the US and Switzerland, are fair at best.
Also, following the relatively strong rebound from the August selloff, investor sentiment has turned bullish again over the past few months, which calls for some caution from an anticyclical, or contrarian, viewpoint.
Thus, going forward, public equity markets should remain supported by fundamentals overall, but we expect to see more frequent bouts of volatility. For instance, we believe today’s widely-anticipated first US rate hike will go down rather smoothly, but the response to the European Central Bank’s last decision in early December has shown how sharply markets can react to even the smallest deviations from anticipated policy shifts. Also, the negative news flow from the emerging markets and the commodity space has not yet turned the corner.
Concluding, for the coming quarter, we have decided to modestly trim our overall equity risk by selling some of our Listed Private Equity exposure. Our public equity allocation remains unchanged at a small overweight, with a clear preference for the developed markets - i.e. Europe, Japan and to lesser degree the US. Our positioning in the remainder of Asia-Pacific and the emerging markets is kept below neutral, with the underweight being most pronounced for the latter.
Fixed income: reduction of near-zero-yielding traditional sovereign bonds We have further reduced our allocation to developed market government bonds. In many cases, this segment offers near-zero or even below-zero yields, and the upside is therefore limited. As a result, in some growth strategies, we now hold no traditional government debt securities.
Beyond that, our overall tactical allocation and views have changed little. We stay underweight sovereign bonds in developed as well as emerging markets, and are slightly overweight in corporate debt securities. The resulting duration is shorter than normal on a portfolio level, and our cash positions are significant.
The weight of inflation-linked
government bonds has passively increased in our portfolios, although
they remain an underweight position (due to the depressed real yields it
offers). Breakeven inflation rates, i.e. the implied inflation
expectations, are very low currently, which makes this class look
relatively attractive in our view. Within our fixed income portfolios, our managers continue to focus on quality borrowers, capturing additional yields when reinvesting bonds (i.e. roll-down returns), and the transatlantic spread trade (i.e. strategies aimed at benefitting from the difference in yield between US and European bonds, and from capital gains that occur when/if that spread starts narrowing).
Alternatives: reduced LPE position to trim overall equity risk As briefly mentioned, we have decided to trim our overall equity risk by reducing our listed Private Equity position from neutral to a small underweight. The rebound from September’s lows was more muted in this sector, possibly signaling an end of outperformance.
Discounts (i.e. the net asset values of LPE vehicles vs. their market value) have narrowed to historical averages on an index level, but there are first signs of exuberance, as some LPE vehicles trade at significant premiums (we should note that this tactical change concerns only the listed part of the Private Equity allocation in our liquid strategies, where short-term shifts in allocation make sense).
Beyond that, we have made no changes in the alternative investment space. Real Estate Investment Trusts, or REITs, remain our only tactical overweight, with the regional positioning reflecting our preference for the developed markets, where we find attractive dividend yields and sound underlying fundamentals.
Meanwhile, the bear market in commodities continues, with the selling pressure having intensified again recently. We like the increasing numbers of supply-side responses in some segments (e.g. large multi-national miners are reducing capacity, China has committed to lower smelter output, etc.). But we believe we still have some distance to go before commodity markets can find a new equilibrium, and thus a basis for a subsequent recovery. The crude oil markets remain particularly well-supplied. We stay underweight the commodity space.
Currencies: Japanese yen added to our strategies In our currency allocation, we have decided to add Japanese yen to our global multi-asset strategies, placing it at a small overweight against our strategic, or neutral, allocation. The JPY is the most significantly undervalued currency of any major economy on a purchasing power parity basis, and the Bank of Japan is increasingly reluctant to ease monetary policy further.
Indeed, a look below the surface of Japan’s economic data reveals steady gains in the prices of domestic goods and services, rising wages, a tightening labour market (i.e. falling unemployment combined with rising labour market participation), and robust corporate earnings. In addition, Japanese equities have continued to outperform for the past year, despite the fact that the yen has stopped depreciating, moving sideways against the US dollar, and even strengthening by about 10% against the euro. These developments suggest that Japan’s reflationary policies, known as Abenomics, are gaining traction in the real economy. Consequently, reliance on further monetary expansion should prospectively decrease.
With regards to the euro, the sharp intraday movements that occurred during the last ECB press conference in early December showed that crowded speculative positions can cause strong temporary reversals in reigning trends. However, we are not convinced that the ECB decision (to extend its quantitative easing program and take interest rates deeper into negative territory) really deviated much from market expectations. We view the response as technical in nature, rather than a harbinger of a reversal in the underlying fundamental trends. We still believe central bank policy divergence will remain a deciding factor in the transatlantic currency relationship, and expect the Greenback to remain strong against the euro and Swiss franc going forward.
We therefore keep these positions favouring the USD over both the EUR and the CHF in place, as the latter is effectively tied to the former. The USD still represents our most pronounced overweight, now followed by the JPY. The EUR, CHF and the “others” are underweight. As before, the emerging market currencies are kept significantly below neutral, as a result of our tactical underweights in the respective regional investment allocations.
Please find additional tables and graphs in the PDF on pages 3 to 4. |
