tactical allocation monthly update
Asset Management
March 2016
BARO METER g l o b a l a s s e t c la s s e s
Equities underestimate recovery potential
We stick to our overweight stance on equities and remain underweight bonds as economic growth is stronger than asset class valuations imply. e q u i ty r e g i o n s a n d s t y l e s
Improving economic conditions in China bode well for emerging market stocks; we also favour Japan and Europe over the US . e q u i ty s e c t o r s
We like consumer discretionary and technology companies, which stand to benefit from a rise in consumer spending. fixed income
We remain overweight U S highyield debt and emerging market local currency bonds on valuation grounds.
UNDER WEIGHT
NEUTRAL O
–
OVER WEIGHT
+
MONTHLY CHANGE
Equities
ASSET CLASSES
Bonds Cash EQUITIES
US
UK
Japan Emerging markets Pacific ex-Japan Energy
GLOBAL INDUSTRY SECTORS
Materials Industrials Consumer disc Consumer staples Health care Financials IT
Utilities Telecoms FIXED INCOME AND GOVERNMENT BONDS
US
Euro Japan Swiss UK EM D local E MD U SD
CREDIT
US I G
Euro I G U S high yield
Euro high yield Emerging corporate Euro
CURRENCIES VS. USD
Sterling Swiss franc Japanese yen
is the investment group responsible for providi ng asset allocation guidance across stocks, bonds, cash and commodities.
the pictet asset managem ent s t r at e g y u n i t (p s u)
Gold
Global market overview
Equities flat as safe-haven assets outperform
G B P/ U S D spot rate 1.75
1.75
1.70
1.70
1.65
1.65
1.60
1.60
1.55
1.55
1.50
1.50
1.45
1.45
1.40
1.40
2.2014
6.2014
10.2014
2.2015
6.2015
10.2015
asset class were signs that China may deliver more monetary and fiscal stimulus to support its recovery. In fixed income, U S high-yield bonds extended their drop, led by energy and mining sectors, as concerns over weak oil prices and uncertainty over the path of U S interest rates encouraged investors to shun risky debt. Japanese government bonds rose sharply, with the yield on benchmark 10 -year debt briefly hitting a record low of minus 0.0 5 5 per cent after the Bank of Japan (BoJ) surprised investors late January by adopting negative interest rates. Yields on U S Treasuries also fell, with the yield on the 10 -year note threatening to break below 1.7 per cent, a level last breached some 12 months ago. In the currency markets, sterling saw a sharp decline as the U K government confirmed it would hold a referendum on the country’s membership of the 28 -member European Union. Sterling fell to a to a seven-year low against the U S dollar as investors priced in an increased risk of the U K ’s exit from the bloc. The Japanese yen was the best performer, rising more than 7 per cent as the currency drew safe-haven bids.
2.2016
Source: Thomson Reuters Datastream
ended a volatile month flat but underperformed E quities bonds as investors grew concerned about the impact of negative interest rates on the banking sector. Gold rose over 10 per cent while the Japanese yen and most developed market government bonds gained as risk-averse investors sought safe-haven assets. Oil ended the month down around 3 per cent, despite a mid-month bounce after Russia and O PEC agreed to freeze production, as concerns about oversupply persisted. Within equity markets, financial stocks were the biggest losers. Concerns are growing that sub-zero interest rates, which are now in place in Japan and many parts of Europe, could squeeze bank profits at a time when lenders’ net interest margins are already at record lows. European equities were a weak spot as data pointing to a dip in growth and an easing of inflation darkened the outlook for corporate profits in the region. Emerging stocks ended the month slightly lower, although the benchmark M S C I E M index hit a six-week high during the month as data pointed to stabilisation in emerging economies. Also lending support to the
1
barometer march 2016
U K E U exit fears weigh on sterling
Asset allocation
Riskier asset classes remain attractive
Improving economic data could help underpin stock market recovery ECONOMIC DATA BEATS EXPECTATIONS
520
40
500
20
480
0
460
–20
440
–40
420 MSCI AC WORLD INDEX, LOCAL CURRENCY
–60
CITIGROUP ECONOMIC SURPRISE INDEX, 1-MONTH CHANGE (RHS) ECONOMIC DATA UNDERSHOOTS CONSENSUS EXPECTATIONS 2.2014
5.2014
8.2014
11.2014
2.2015
5.2015
8.2015
11.2015
2.2016
Source: Thomson Reuters Datastream, Citigroup
sentiment remains fragile thanks I nvestor to some uninspiring economic data from the U S , Europe and Japan. Some market gauges already imply the U S is heading into recession: U S high-yield bonds and Treasuries put the chances of a slump at about 7 in 10 , according to our calculations. We believe a U S recession is off the cards – our central scenario remains one of continued, albeit slower, growth, underpinned by a steady improvement in economic conditions in China. And though the U S Federal Reserve threatens to provoke more market disruption if it hikes interest rates further,
other central banks are likely to be mindful of the fragility of their own economies and act accordingly by loosening the monetary reins. As a result, we are maintaining our overweight in stocks and our underweight in bonds. Our proprietary busin e s s c yc l e indicators point to modest growth in both developed and emerging markets with the U S and China looking most likely to deliver positive surprises. In the U S , economic growth remains robust but has eased due to the drag on exports from a strong U S dollar and weakening demand overseas. A weak energy sector has also hampered economic performance. But American consumers, traditionally the main economic motor, remain in good shape as highlighted by strong retail sales, reflecting the boost to purchasing power from low energy prices as well as accelerating wage growth. We expect private con-
2
sumption to grow at yearly clip of about 3 per cent, helping the U S economy expand at just under 2 . 5 per cent this year.
Similarly in Europe, private consumption continues to drive the region’s economic recovery which is continuing, albeit at a more moderate pace than in the U S . Low oil prices and a stronger labour market are likely to continue to support consumer-led growth for now. However, industrial production saw significant declines late in 2 015 and German exports have weakened, reflecting
MARKET
DATA
MARKET
DATA
MARKET
DATA
Major asset classes Bonds: asset class spreads 140
130
130
120
120
110
110
100
100
90
90
80
80
70
70
7 In percentage points
7
6 EM HARD CURRENCY VS US TREASURIES EURO INVESTMENT GRADE VS BUNDS EURO HIGH YIELD VS BUNDS
6
5
5
4
4
3
3
2
2
1
1
MSCI GLOBAL EQUITIES 60
60 JPM GLOBAL BONDS GSCI INDEX 50 USD
50
30
30
2.2014
5.2014
8.2014
11.2014
2.2015
5.2015
8.2015
11.2015
2.2014
2.2016
5.2014
8.2014
11.2014
2.2015
5.2015
8.2015
11.2015
2.2016
Equity sector rotation and currency performance Global equity sector rotation: performance of cyclical vs defensive stocks
Performance: currencies vs U S D
105
105
110
110
100
100
100
100
95
95
US 90 E MU EM JP
90
90
EUR 80 GBP CHF JPY
90
80
85
85
70
70
80
80
60
60
2.2014
5.2014
8.2014
11.2014
2.2015
5.2015
8.2015
11.2015
2.2016
2.2012
8.2012
Source: Pictet Asset Management, Thomson Reuters Datastream / J P M and BoA Merrill Lynch
3
2.2013
8.2013
2.2014
8.2014
2.2015
8.2015
2.2016
barometer march 2016
Performance: asset classes 140
MARKET
DATA
MARKET
DATA
MARKET
DATA
MARKET
Risk bias indicators UNDER WEIGHT
NEUTRAL O
–
MONTHLY CHANGE
OVER WEIGHT
+
Business cycle
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Liquidity Valuation
