Here are the recommendations of Fabrizzio Quiriguetti, head of fixed income and multi – asset SYZ AM , on how to position their portfolios in the current uncertainty. How to perform an efficient allocation when everything is expensive and there are uncertainties everywhere? Global growth remains just above the stall speed and is vulnerable to any weakening of its current fragile dynamism.
Given the hectic macroeconomic environment and valuations do not help, it is clear that it makes no sense to assume too much risk in portfolios or equity or in fixed income securities. The main obstacles to a new bull market in emerging market equities are very pessimistic economic outlook and the high degree of political uncertainty in many emerging economies such as Brazil, Turkey, South Africa, Russia, etc.
As we approach the start of Euro 2016, I’m feeling something like a coach; hopefully one that wins titles … more like a Ranieri than a Domenech, so to speak. In trying to analyze the market situation and the strengths and weaknesses of assets to carry out an optimal assignment, mytop priority is not to lose money (or yours or mine), so we can continue to have opportunities to end up winning the game. The challenge I currently face is a level playing field in poor condition, with economies that try to muddle through, lack of dynamism as far as growth is concerned, some overindebted actors, ineffective monetary policies and some other political uncertainty The horizon. In other words, I feel a bit like Cantona playing with a deflated balloon against a team of zombies on another planet. Easy? Absolutely!
By analyzing the assets of which I have, I start to worry really. Currently, cash tends to assume a cost (something like playing with a Spanish goalkeeper in the eighties). Public debt is so expensive that it can not provide too much coverage my portfolio and mark me I risk a goal into his own net. Equities does not provide sufficient damping effect as regards valuations (call it “insufficient technical skills”) to increase the lead for complicated or market uncertainty periods. And on top sometimes these asset classes struggle to play together when the correlations change, or when protesting the positions where they happen to play in my portfolio because of a sudden and significant sector rotation. And, last but not least, the dollar is behaving like a purchased referee, as it moves to the sound of any action or statement from the Fed.
All this makes me think that the titles that returns offered, emerging debt and alternative investments (midfielders), are not so bad. In relation to the rest of the team, I mean.
So I face a challenge: how to conduct an efficient allocation when everything is expensive and there are uncertainties everywhere? If you know where I am, it will not surprise you that my current tactical approach is the catenaccio: I just waited a point better entrance, perhaps in mid-June, when uncertainties about the Fed dissipate (stating that we do not expect a rise in types) and just before the likely vote in the UK against an exit from the EU, steal the ball and make a quick counterattack to also provide this year you and all your customers an interesting risk – adjusted return. Until then, I will just turn on the TV, grabbing a beer from the fridge, enjoy the games and try to get my wife did not remove red card.
After the dissipation of the major concerns about growth that emerged earlier this year, l world economy is returning to settle in the positive expansionary albeit slow that has prevailed since last year. Global growth remains just above the stall speed and is vulnerable to any weakening in its current fragile dynamism.
Although structural deflationary forces persist, inflation could rise in the short term due to the rebound in energy prices. Still, monetary policy will continue to have a strong accommodative global component, since the weak growth and high debt levels guarantee the maintenance of lax financing conditions.
The main pillar of the current expansion remains private consumption. Industrial activity is stabilizing after the sharp slowdown in 2015, although the sluggish investment because of anemic growth prospects and reducing corporate profits are preventing a significant rebound. Several gaps that emerged last year have stopped ampliarseo even are narrowing: dynamic emerging economies to developed, producers against importers of raw materials, tertiary sector to secondary sector, peripheral countries versus core countries the euro zone … Except in a few specific countries, all economies are growing around its potential growth (downward), with no hope of an acceleration register in the coming quarters.
The recovery in prices of raw materials and energy, and possible upward pressures on wages in some economies currently increase the risk of a short – term acceleration in overall inflation figures. However, the lack of dynamism in demand, overcapacity, fluctuations in exchange rates and structural deflationary factors (demographics, high indebtedness) prevent any continuing intensification of inflationary pressures worldwide.
In this context, central banks have no choice but to stick to their own accommodative stance, with the sole exception of the situations in which currency devaluations dangerously inflate inflation. The few central banks that still have some ammunition are even more flexible policies. It is unlikely to accelerate in the short
term figures headline inflation significantly alter its position, because they can not afford to risk adjusted financial conditions, in view of the high sensitivity of growth to credit in the indebted economies. Even if this means that they are perceived “lagging behind the inflation curve” temporarily.
The US economy is entering the second quarter with a stronger, both in the tertiary sector and in the secondary activity, which portends a rebound after the dismal first quarter. However, several indicators hint at the fragility of the underlying economic context. The widespread decline in corporate profits, tighter conditions for granting commercial loans and the slowdown in job creation point to the persistence of downside risks regarding the outlook for US growth.
In the euro area , GDP has finally returned to resume their 2008 highs after a first quarter of strong growth driven by domestic consumption as unemployment is reduced. Instead, the UK is experiencing a generalized slowdown since the previous uncertainty referendum on remaining in the EU or not hampers the activity. It is likely that this trend be reversed if voted on by the permanence.
The Japanese economy is experiencing a marked deterioration of economic indicators and appears again flirting with recession. The strong yen is weighing on exporters but oriented sectors to the domestic economy are also seeing harmed. Pressure on the BoJ to return to relax its policy are increasing, although it is likely that the stigma of failure of the measures implemented in January next G7 meeting and elections to the Senate will lead to not make a decision until summer. In Australia , despite the recent improvement in growth dynamics, the central bank has resumed the trend of monetary easing to fight deflationary pressures.
The recent upturn in China is already disappearing, since the authorities are unwilling to let the credit – driven growth continue unbalancing your endeudadísima economy.
The structural trend of slowing growth continues and the economic outlook still overshadows neighboring countries such as Taiwan or Korea. Brazil, South Africa and Russia are affected by the economic slowdown and high inflation, although the latter is experiencing an encouraging trend in the level of prices that could open the door to an easing of monetary policy. Ag continues to reign ran political uncertainty in Brazil even though the end of the power vacuum , with the appointment of the Government of Temer- can leave the door open to implementing some much – needed economic reforms. In Turkey, the decline in inflation is allowing the central bank to ease monetary policy and support a domestic economy and tough, although the threat of a sharp decline in tourism during the summer hangs like a pall over the economic outlook.
The picture in the field of equity has also remained broadly unchanged. Based exclusively on valuations, Japan and Europe we seem moderately more interesting than the United States. Still, all the major stock exchanges maintained at the same level relative preference. This is because the US equity market contributes considerably less to overall portfolio risk than other markets. Thus, US stocks represent an effective method of exposure to equity risk without taking too much overall risk in the portfolio. In addition, all macroeconomic developments mentioned above (except football prediction) are
moderately favorable for the dollar, providing additional cushioning for US equities. Our stance towards emerging market equities also remains the same, with a slight preference for Asia compared to other regions. Take
advantage of emerging markets in the context of our assessment framework is complicated. The sharp cheapening of emerging markets fixed income is seriously undermining any investment argument for equities, at least in the EMEA region and Latin America. And all this despite the fact that corporate profits and the intrinsic cost of capital are
improving in these regions. The main obstacles to a new rise in emerging market equities are very pessimistic economic outlook and the high degree of political uncertainty in many emerging economies such as Brazil, Turkey, South Africa, Russia, etc.
British Gilt seem a little less expensive than previously but in general fixed income markets universe developed still showing fairly muted. Within this classification it is noteworthy the Australian market. It is true that the Australian debt yields have reached their minimum long term; However, interest rates remain at 1.75%, with margin to spare to make cuts if necessary. As we noted in our economic prospects, and l central bank continues to struggle with deflation, and could make further rate cuts. In addition, it is likely that any new abscess economic weakness in China (we fear it could monopolize most advanced headlines year) intensify the pressure on the Australian central bank to adopt an even more accommodative stance. In other segments of the fixed income universe, our analysis
has also undergone some changes. Emerging market bonds denominated in hard currencies have witnessed a dramatic compression of spreads on corporate debt. Take Russia , for example: earlier this year, the performance of the Russian seven – year government bonds denominated in dollars was around 5.3%, while now stands at 3.9%, after rising from 3, 7% a few weeks ago. Given that the yields of Russian government bonds were quoted only 100 basis points below just before the instability of 2013 by the withdrawal of stimulus (when yields on emerging market bonds reached record lows), it is clear that the market he has granted numerous good news in the bond market, such as new oil price hikes and the withdrawal of all economic sanctions. Henceforth, we believe there to be very selective when choosing which emerging market bonds in hard currency we buy, as opposed to simply being exposed to market as a whole. In our opinion, Brazil, South Africa and Indonesia still offer some value.
Our assessment of these asset classes has remained unchanged and monetary assets continue to head. And while it is likely that the dollar continues to depreciate, since it is somewhat expensive, very short – term risks for the greenback are oriented upward.