In February it was largely possible to offset the price bumps from the end of January – however, it showed how quickly the markets can switch to “risk-off” mode. Most economic data continue to support the view that the economic recovery is continuing…
Swisscanto Investment Update March 2014
We are slightly increasing our equity allocation at the expense of commodities.
We find ourselves in a period of synchronous growth in the three large economic blocs of the USA, Europe and Japan. Only the emerging markets are developing inconsistently. Overall, this economic background gives the equity markets further backing. Despite the setbacks a month ago, medium-term and long-term momentum for equities remains positive. A collapse of the high profile ISM Index in the USA does not quite fit into this rosy picture – however, the marked decline in factory orders was mostly dismissed as being “due to the weather” and in our view is normal following the strong fourth quarter. For the current year, we are still expecting US economic growth of around 2.5 per cent.
Equities: US companies deliver, European companies suffer
Following a period of negative earnings revision, we are now expecting somewhat better figures from the equity analysts. The reporting season has been positive so far, particularly in the USA: US companies are “delivering” – in terms of both turnover and profits. Unfortunately, the same cannot be said of European companies – yet. This slowdown is supposedly due to weak demand in the emerging markets and the strong euro. We believe that stronger profit dynamics in Europe are only a matter of time, and we are maintaining our overweight in European equities.
Bonds: Upgrade in European periphery
The return of the appreciation of bonds in the European periphery was underpinned by the upgrade that Spain received from the ratings agency Moody’s (Baa2, from Baa3). We are neutrally weighted in terms of periphery bonds and are letting profits grow. On the lending side, default rates remain stable at a low level. The increased price is thus justified by good economic development; the market for corporate bonds also continues to be well supported thanks to strong demand and limited supply.
Currencies: US dollar long against Japanese yen
The latest valuation of the Japanese yen will be used to get back into USD/JPY, because we are expecting additional short or long-term measures in Japanese (monetary) policy to boost Japanese growth. This will lead to a further weakening of the yen.
Tactics: More equities, fewer commodities
Our systematic market observations of risk premiums, sentiment and volatility have provided slightly positive results for equities; these results justify the continuing overweight in equities in the mixed portfolio. Following the somewhat more defensive position a month ago, this has prompted us to slightly increase the equity allocation again. This is at the expense of commodities, for which we do not currently see any further upside potential following the price increases since the beginning of the year.
Source: ETFWorld – Swisscanto