September was a month of investor doubt due to disappointing economic data, most notably on jobs and property. The Euro zone saw growth in the second quarter that easily beat forecasts, especially in Germany, but it also succumbed to risk aversion as fresh worries emerged over peripheral country debt....
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As a result, the best-rated government bonds rallied to historic highs, sending the yield on the 10-year German Bund down to a low of 2.13%. Equity markets consolidated sharply, despite better than expected companyresults: between July 26 and August 27, theS&P lost 4.5%, the Euro-Stoxx 50 4.1% andthe Nikkei 5.4% while the MSCI EM in EURwas stable at +0.4%, essentially due to theappreciation of emerging currencies againstthe EUR. Paradoxically, the dollar recoveredto 1.276 against the EUR as worries over theUS economy escalated.
Bonds
Because of our economic scenario and current, historically low yields, we are not changing our overall =/- view on government bonds. Our positions geared to a fl attening of the yield curve and thepartial switch of shorts to US bonds have helped us cushion the negative impact of the under-sensitive bias in our portfolios. Although we are tempted to turn negative due to current levels and budget situations, the momentum is so strong that we prefer to wait.We are continuing to switch shorts on Germany to the US and the UK due to relative interest rate levels, taking advantage of volatility to sell puts against our positions.No change on credit which has been unaff ected by the deteriorating environment: we have maintained a =/+ score on High Yield and + on USD or EUR-denominated emerging debt which is still attractive at these levels. We have also maintained our positions on shortdated local emerging debt to benefi t from the continuing appreciation of underlying currencies and the yield from a steepening curve. And we still have a + rating on international convertibles although we are slightly more cautious as yields now off er less protection.
Currencies
We turned positive on the dollar in the 1.3- 1.32 range. We are maintaining this position as the dollar’s protective status would partially compensate for our other positions were the situation to worsen. We remain negative on the yen against the dollar; the yen has benefi ted from revised expectations for short rates in other zones and its traditional safe haven status despite the fact that the Japanese economy is sinking once again into defl ation. There is now a strong possibility that that BoJ will step in to halt the rise in the yen. We remain positive on emerging currencies as they should benefi t from the cyclical upturn and higher interest rates.
Equities
We have maintained our equity scores while remaining active: frequent and sometimes intraday swings aggravated by thin volume have provided opportunities to use options and futures for tactical position changes. For example, the surge in the 6 month skew on levels that are seldom reached looked like a good entry point for exposure based on rising tunnels. We are tempted to increase exposure because of (i) our scenario, (ii) second quarter results, especially in Europe where sales growth also beat forecasts and (iii) valuation levels. That said, ahead of a busy schedule of US economic data releases, we prefer to wait and see. We cannot rule out the possibility that markets might retest lows on disappointing news. What’s more, volatility is rising but is still within key levels. In short, we are confi dent on equity market performance up to the end of the year but believe September could provide us with better opportunities to reinforce exposure. We still prefer European equities -on valuation grounds and because the euro has weakened- as well as emerging equities. With global growth still positive but slowing down, the relative attraction of leading emerging economies is on the rise because of their positive growth diff erential and a reduced risk of overheating. This makes them the investment zone to focus on either directly or through companies in developed countries which have broad emerging market exposure. We should, however, watch valuations carefully. Lastly, we are maintaining the tactical + on Japan decided on last month as we have yet to see the levels we had targeted.
Source: ETFWorld – EDMOND DE ROTHSCHILD ASSET MANAGEMENT / Asset allocation strategy
Disclaimer: the fi gures comments and analysis included in this presentation refl ect the opinion of Edmond de Rothschild Asset Management or its affi liates concerning markets, market trends, regulations and taxation, based on its own expertise, economic analysis and information in its possession on this date. However, this presentation under no circumstances constitutes a commitment or guarantee by Edmond de Rothschild Asset Management. Under no circumstances, shall Edmond de Rothschild Group be liable for investment decisions to acquire, sell or hold investments based on these comments and analysis. Each investor shall be responsible for obtaining the different regulatory disclosures for UCITS or other fi nancial product before making an investment, to analyze the potential risk and form an opinion independently of Edmond de Rothschild Asset Management, supported as necessary, by the opinion of professionals specialized in these matters to ensure notably that this investment meets the investors needs and situation. Prospectuses registered with the Autorité des Marchés Financiers are available on request from our web site: www.lcf-rothschild.fr.
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