In March the markets were only temporarily affected by the Crimean crisis, flagging Chinese economic data and the interest rate message from new Fed boss Janet Yellen. Fundamental backing from an upturn in economic growth continues….
Swisscanto Investment Update April 2014
We are maintaining our overweight in equities but slightly reducing our underweight in bonds through an improvement in the emerging markets.
The early global economic indicators are at a three-year high. Further acceleration was seen in the USA after the winter slowdown. A prominent factor here is the growth in wages (which is at a three-year high), which could impact the solid inflation expectations to date. In light of this, the announcement by the new Fed boss to decide on the first base rate increase in the new interest rate cycle is slightly earlier than the markets would have expected. In Europe the recovery is continuing: in former crisis states several reforms have been undertaken: in general people there are no longer living beyond their means. The new international competitiveness of peripheral states is proven by rising exports.
Emerging markets: calm
Although currencies in several emerging markets suffered heavy distortions at the start of the year, the situation has now calmed. Despite this, investment capital continues to drain away, which on some equity markets such as Russia and China, has resulted in noticeably lower valuations on the equity markets in terms of the price-to-earnings ratio. The Crimea crisis brings with it isolated risks, for example for certain Gazprom bonds, but will have almost no impact on the current economic scenarios. With regards to China, we believe that there are big question marks regarding conduit banks and the real estate boom. The moderation of growth desired by politicians will, however, be properly implemented.
Bonds: no longer surfing the wave
Geopolitical risks are setting the short-term trend on the market for safe government bonds. This overshadows the belief that the economic situation would in reality justify higher interest rates. We are maintaining our significant overweight in bonds as well as a below-average duration – with the exception of emerging markets, which we are giving a neutral weighting with immediate effect. For corporate bonds, the time when investors could simply surf along on the crest of the wave of general spread narrowing is clearly over. Careful industry and stock selection promises success however.
Equities: slight overweight still justified
For the equity markets, the crisis in Crimea was just a storm in a tea cup. We are buying a position in Russian equities in order to benefit from the price recovery in the short term due to the very low valuation levels there. The stronger wage growth in the USA will probably not yet impact the US markets. From previous economic cycles it is known that as wage pressure rises, company operating margins only pass a peak one year later. The valuation of US equities is slightly above the historical average, with individual equity segments – such as biotechnology or internet content – selling like hot cakes. By contrast, European equities continue to experience valuation haircuts.
Source: ETFWorld – Swisscanto