The markets are seeing the negative impact of a further weakening global economy being offset by the willingness of central banks to supply plenty of liquidity. In our estimation, the policy of cheap money will have a greater impact on the mood of investors in the medium term.....
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Swisscanto Investment Update October 2012
The mostly negative news on the economic and political front expected in the near future will be “in competition” with the promised liquidity injections from central banks, in the eyes of market participants. Whether the ECB, the Fed, the Bank of Japan or the Bank of England – in their own way they will all pump additional money into the system in order to stabilise the situation. In the medium term, the almost unlimited provision of liquidity is likely to have a greater effect on investors’ sentimento than the weakening economy. In this context, an overall higher risk tolerance is justifiable for Swisscanto. In our opinion, a liquidity-driven rise in stock prices is still possible even if the economic situation continues to deteriorate.
European equities extremely undervalued
Given the low valuation of the stock markets, the equity allocation is increased, primarily by investing more in European stocks. According to our conservative valuation model, European equities (excluding Switzerland and the UK) are undervalued by more than 60 per cent. Asian equities (excluding Japan) are also increased slightly. Within the equity allocation we continue to hold overweights in the sectors of food, beverages and tobacco, health care, software, energy, pharmaceuticals and media. We are cautious towards the sectors of insurance, telecommunications, real estate and utilities, amongst others. As a countermove to increasing the equity allocation, we are mainly reducing the allocation of money market instruments.
More conservative direction in corporate bonds
In the case of bonds, we are maintaining our cautious stance towards securities in the peripheral countries. While we do not hold any Spanish government bonds, our proportion of Italian securities is well below that of the benchmark. We are also tolerating slightly fewer risks in our portfolios with corporate bonds. Although we still prefer these over government bonds, our requirements in terms of the quality of the issuers continue to rise.
Currencies
Our currency strategy remains largely unchanged compared to the previous month. Thus we are maintaining our overweight in the US dollar and the Norwegian krone against the Swiss franc. We are now building up an additional long position in the US dollar against the euro in order to protect ourselves against further turbulence in the Eurozone.
Source: ETFWorld – Swisscanto (Thomas Härter – Head of Investment Strategy)
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