Swisscanto: May 2014 Consistent investment policy for equities and bonds

The markets showed little change at the end of April compared with the previous month. We are keeping our investment policy for equities and bonds consistent. The US Federal Reserve and the European Central Bank emphasised their willingness …..

Swisscanto Investment Update May 2014

to keep interest rates low to continue to support economic development. This works in favour of equities. However, taking on more risk by increasing our equities position is opposed by the escalation of the conflict in Ukraine.

With the exception of Japan, early economic indicators worldwide have continued to develop positively, so good economic development is expected to continue. Satisfactory employment growth can be seen in the USA, without a further increase in wage pressure. Inflation expectations there are exactly within the target range of two per cent. US companies are mostly reporting good results this reporting season – not least as a result of the rather weak US dollar.

Currencies: Further “Abenomics” expected in Japan
Deteriorating early indicators for the Japanese economy reinforced our expectations that there could be a further wave of “Abenomics” to support the Japanese economy. The desired additional effect would be a further weakening of the Japanese currency. Therefore, we are maintaining our short yen/US dollar position. With regard to economically well supported Scandinavian currencies, we are focussing on the Swedish krona as well as the Norwegian krone for reasons of diversification. Both currencies provide an interest advantage and are undervalued against the Swiss franc.

Emerging markets: A return to capital inflows
The Ukraine crisis poses a significant short-term risk for the equity and capital markets. However, we do not expect a long-term detrimental effect on our economic scenarios. We are maintaining our position in Russian equities, whereby we are expecting the crisis to subside soon. Overall, the emerging markets have begun to recover from the turmoil of previous months. Capital has recently begun to flow back into equities and bonds on these markets.

Bonds: Extensive low interest cycle
Declining inflation fuelled fears of deflation in Europe, where discussions were commenced about bond purchases by the European Central Bank (ECB) analogous to the quantitative easing in the USA. An important factor in this was the new (verbal) backing that the European peripheral countries received. Meanwhile, the continuing rally of peripheral bonds pushed their returns to levels lower than those before the European debt crisis. Thus the issuing window for the favourable refinancing of national debts was opened for southern European countries, and eagerly made use of by them – even Greece. Bonds remain underweighted in our investment policy; we prefer shorter durations.

Equities: In the USA, we have seen strong outperformance in value stocks
Equities have continued to receive backing from the continuing recovery of the worldwide economy. Prices are increasingly being driven by acquisition activities facilitated by cheap liquidity. Our preference for value stocks rather than growth stocks has been fruitful in the USA; in our experience, once put into place, such outperformance will continue.


Source: ETFWorld – Swisscanto

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