Considerable overweight in commodities – slight overweight in equities


In the markets, the European debt crisis will probably continue to cause temporary setbacks. Regarding equities, the valuation justifies a cautiously positive attitude; corporate bonds are preferred to government bonds. Commodities continue to be insurance for the case that the crises escalate....

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            A viable long-term solution of the European debt crisis is currently not in sight, which is why this topic flares up on financial markets again and again. The fact, however, that such “horror stories” come up periodically is quite intentional on the part of the highly competitive countries within the euro area. The thesis is: Without such stirring reports, there will be no pressure for reforms in the overindebted and less competitive countries on the European periphery. Investors should therefore know that the “horror stories” will continue to be used by individual EU countries to maintain the pressure. Because, as long as there are no effective sanctions against countries with irresponsible economic and financial policies, it is the markets that must assume this disciplining function. The debts of Greece, Portugal and Ireland are unlikely to be restructured any time soon because the consequences would be massive, such as a bank crisis in the EU, social unrest and a major market correction.

            US dollar dropped too low

            With regard to national debts in the USA, it is clear that a further deterioration would be negative for the USD. At the moment, however, according to our calculations of purchasing power parities, we consider the American currency to be undervalued against the CHF. A very great deal of bad news concerning the US economy has already been priced in, which is why we are currently overweighting the USD in our currency strategy. The overweight in the commodity currencies AUD, CAD and NOK will be maintained. As a consequence of the various crises in the past few months, the CHF has risen against practically all currencies. If the crisis situation gives way to “normality”, a weakening of the Swiss currency is highly probable.

            With regard to interest rates, we are not betting that the ECB’s interest rate increase in April will have been the last for the foreseeable future. Therefore, we are retaining a below average duration in the EUR and CHF bond portfolios. We prefer corporate bonds to government bonds. As a result of companies’ good cost management, all in all, and of the good liquidity situation, the default risks remain very low.

            According to our calculation model based on trend profits, the global stock market is now fairly valued as measured against the MSCI World index. Certain sectors, however, still harbour upward potential, such as equities from Continental Europe. All in all, this suggests that equities should still be slightly overweighted.
            As for commodities, we continue to expect a rising trend as a consequence of the various trouble spots, in particular those in the Arab countries. In addition, there is a favourable rolling situation in the case of contracts for crude oil.

            Source: ETFWorld – Swisscanto (Thomas Härter – Head of Investment Strategy)

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