Our “risk-on” stance continues in this second week of January as equity markets are taking investors to new highs.
After a long period of calm, the bond market was again in focus, as US and German 10Y government bond yields jumped by more than 10bp, resulting in an overall rise of close to 20bp since the start of the year. European peripheral bond spreads tightened further.
What contributed to the sell-off?
1. The Bank of Japan’s reducing its long-end bond purchases on Tuesday,
2. China reducing their Treasury holdings, although it was later denied, and
3. A surprisingly hawkish ECB minutes on Thursday.
Finally, the week ended with a slightly higher than expected December core-CPI in the US. The latter continues a pattern of alternating strong and weak readings over the past 6 months. In addition, these slightly bigger consumer price pressures were echoed by further strength in consumption. Overall, the current growth / inflation mix comforts our risk-on stance, leading us to add to our short duration exposure.
This week will mark the start of the Q4 earnings season and we will monitor how well it will support the current positive momentum.
Our current investment strategy on traditional funds:
grey : no change
blue : change
EQUITIES VERSUS BONDS
We remain positive on equities via both the euro zone and Japan.
- Global economic momentum is accelerating further, however geopolitical risks remain.
- We concentrate our portfolio’s regional positioning on the euro zone and Japan. Emerging markets are benefitting from supportive fundamentals and a weaker US dollar.
- Central banks are turning less accommodative:
- The Federal Reserve started its balance sheet reduction in October, hiked in December and should hike three times this year.
- The ECB has recalibrated its programme, buying less bonds as of this month. A rate hike should not occur before 2019.
- Equities have an attractive relative valuation compared to credit.
REGIONAL EQUITY STRATEGY
- We remain positive on euro zone equities which are supported by a strong economic and earnings momentum and relatively attractive valuations.
- We have kept a neutral tactical stance on emerging markets equities.
- We have become less negative on UK equities.
- We remain neutral on US equities. Donald Trump has recently signed the tax bill passed by Congress, but the FY 2018 spending legislation is still pending.
- We are positive on Japanese equities. Following the elections, the Prime Minister Abe’s mandate has been validated, hence we see an increased visibility on the policy mix for the coming quarters. Strengthening growth and a supportive domestic policy mix are among the main performance drivers and the BoJ confirmed that it would not join other central banks in tightening its monetary policy anytime soon, which should ultimately lead to a weaker JPY. Furthermore, Japanese earnings have been progressing so far without a depreciation of the JPY.
- We are negative on bonds and have a low duration.
- With a tightening Fed and expected upcoming inflation pressures, we assume rates and bond yields should continue their uptrend.
- We continue to diversify out of low-yielding government bonds:
- We have a neutral view on credit, as spreads have already tightened significantly and a potential increase in bond yields could hurt performance.
- We have a diversification in inflation-linked bonds.
- We keep our positive stance to emerging market debt, as the on-going monetary easing represents an important support.
- We are neutral on high yield. The correction on US High Yield market observed recently is not expected to continue.