An improving economic situation and heightened expectations of inflation raise the prospect of a trend reversal in interest rates. This further increases the attractiveness of equities as an asset class. ....
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Equity returns in the first quarter were the highest for more than a decade, though it is still unclear whether this will prompt hitherto risk-averse investors to rethink their approach. At any event, the restructuring of Greek sovereign debt has brought a measure of calm to the markets. With the US economy continuing its recovery and the Eurozone facing only a mild recession, the near future holds no unpleasant surprises in store on the economic front. The most recent figures from China also suggest that the slowdown in growth is gradual and will lead to a soft landing. The only factor that could put a damper on market sentiment is the oil price, which is markedly higher than it was at the end of 2011.
Oil price driving energy stocks
Despite the positive overall price trend of recent weeks, the equity markets as a whole remain cheap – particularly in Europe, and especially where small-cap value stocks are concerned. We are therefore maintaining our overweight in equities but making changes within our equity strategy, the principle now being to favour value stocks over growth stocks. In terms of sectors, energy stocks are likely to benefit from the ongoing political tension between the US/Israel and Iran, which will in turn probably keep oil prices high. We are underweight, however, in telecom stocks.
As far as long-term interest rates are concerned, investors should gradually begin preparing for an upturn. This turnaround could be prompted by the continued improvement in the economic situation, heightened inflation expectations and a shift from top-quality government bonds towards riskier investments. For this reason, we are keeping the duration of the bond portfolios slightly below average overall. Within our bond strategy we believe high-yield paper is attractive, as the corporate sector should be able to weather a mild recession without major defaults. Swiss real estate continues to offer a substantial yield advantage in a direct comparison with Confederation bonds, and for this reason we are maintaining our overweight.
In terms of currencies, we are increasing our overweight of the US dollar against the Swiss franc. The US currency is not only undervalued but also offers a yield pickup in this direct comparison. The Norwegian krone is an energy-sensitive currency that benefits from higher oil prices.
Source: ETFWorld – Swisscanto (Thomas Härter – Head of Investment Strategy)
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