Relative valuations speak in favour of equities and against AAA government bonds. We are therefore increasing the equity share by one percentage point. We are selling emerging markets’ bonds at a profit and slightly reducing the overweight in hedge funds…
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The decline in economic growth had been correctly forecast by market players. Therefore, when it did materialise, it did not put a very great strain on the stock markets any more. In addition, the most recent leading indicators once again offered generally positive surprises.
Apart from a few vague declarations of intent, the G20 meeting did not produce very much in concrete terms. The only tangible result is that the seats in international organisations will be reallocated in favour of emerging markets, and the only signal of any use to us is that, if the USD were to become subject to accelerated devaluation, the USA would adopt a favourable attitude towards concerted actions to support the currency. Regardless of this, we believe that the USD will initially become more stable against the CHF. At some 18%, the undervaluation of the USD against the CHF in accordance with purchasing power parity is relatively marked.
AAA government bonds are historically expensive. There is a relatively high probability that central banks will manage in the medium term (2 to 5 years) to boost the economy and/or to increase inflation rates and/or to “manipulate” the prices of risky investments upwards. That is why we are continuing to overweight corporate bonds, including high yield bonds.
We still avoid the short and the very long ends of the maturity spectrum. Since there is virtually zero return on money market investments, we continue to regard them as unattractive. Nevertheless, in the strategy for the Portfolio Fund Balanced their share has risen compared with the previous month as a result of cutting the overweight in Swiss bonds. We are thus responding to the danger of interest rates in Switzerland rising further in the next few months.
PIIGS (Portugal, Ireland, Italy, Greece, Spain) bond positions remain underweighted as a whole even after the additional purchase of Italian and Spanish government bonds.
Since we recommended emerging markets’ bonds to the detriment of the USD share at the beginning of March 2010, the JP Morgan Emerging Markets Bond Index has risen by over 13% in USD. The past few months’ enormous inflows of money from investors looking for yields have forced various emerging markets to introduce capital market restrictions or to look into doing so. Although we are not fundamentally negative in our attitude, we consider the narrowing of differences in yield to be exaggerated. We are therefore cutting back our investments in emerging markets’ bonds and shifting the risks to the equities sector. Because even after the encouraging price development in the last two months, equities are still attractively valued.
The fair value, which is essentially determined by corporate profits, was some 18% below the current index level at the end of October. According to IBES figures, analysts are expecting profits to grow by some 16% in 2011. Even if this average estimate is ambitious and the valuation gap will not necessarily be closed quickly owing to the uncertainty regarding the further economic development, we are assuming that the equity market’s overall yield will clearly exceed that of AAA government bonds. On account of valuations and yield expectations, Swisscanto is increasing the equity share by one percentage point. In view of the existing overweight and the good market performance in the past month, practically no additional shares have to be bought.
We regard the European stock market as particularly interesting. We favour small caps against large caps in all markets. Due to the high holdings of liquid funds and the attractive valuation of many of these equities, we continue to expect acquisitions made mainly by large companies. We still prefer cyclical sectors to more defensive industries.
On the currency side, we are keeping CHF, EUR and JPY underweighted against the commodities currencies CAD and AUD, and also against the SEK. The CHF has become “expensive”. We are now more positive again in our attitude towards the USD.
Source: ETFWorld – Swisscanto (Thomas Härter – Head of Investment Strategy)
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