ASSET ALLOCATION UNCHANGED
We have not changed our asset allocation. Our neutral position on equities reflects our bearish view on the global economic cycle and the outlook for earnings and the supportive stance of monetary policy. Our underweight in emerging equities versus developed equities is driven by the relatively narrow growth differential and more favourable monetary policy in developed economies. We are underweight Europe and Japan versus the US since these economies appear chronically weak currently.
We are underweight government bonds. Since we are convinced that government bond yields in highly rated countries will stay low, we are looking to reinstate a tactical long duration position. We are underweight ‘peripheral’ eurozone bonds versus core bonds and underweight eurozone inflation-linked bonds. We do not see any inflationary pressures in the region now.
We have a relatively large overweight position in emerging market USD-denominated debt. In stark contrast to Europe, we expect upgrades of sovereign credit ratings to continue given the improving economic governance and the persistent bid for relatively highquality spread products in the search for yield. Since we like the debt quality more than the currencies, we prefer hard currency debt. We are neutral on corporate bonds.
We see downside risks for commodities, although we are neutral, except for gold where we are overweight. Two positions reflect our negative bias towards Europe.
We are underweight European small-cap equities. The recession has seriously weakened their earnings prospects and we see little chance of that turning around in the near future. We are underweight the euro against a basket of currencies that broadly matches the European trade-weighted exchange rate. We expect a weaker currency to be part of the adjustment mechanism that should eventually restore the economy to health.
Joost van Leenders, CFA Investment specialist - allocation & strategy
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