Much Ado About Nothing? On 14 June, we concluded our quarterly allocation review and decided to raise our equity overweight in Japan, reduce positions in Asia-Pacific, and keep emerging markets underweight. Since then, despite some scary-sounding headlines and continued market volatility, the Nikkei 225 has surged by 10%, with the other markets trailing at broadly unchanged levels. Nevertheless, Japan’s strong rebound suggests that the global “correction” is ending as well….
Sign up for our weekly Newsletter and receive the latest ETF and ETC news. Click here to register for your free copy
Mikio Kumada, Global Strategist at LGT Capital Management
Constructive global economic and market outlook
In the course of our regular quarterly tactical asset allocation review on 11-14 June, we had come to the conclusion that the global economic and market environment remained constructive enough to warrant maintaining a significant overweight in equities. Specifically, we liked the outlook for Japan and the United States, while detecting little progress in Europe as yet, and a somewhat deteriorated situation in Asia-Pacific and the emerging markets. Against this background, and given that Japan’s stock market had significantly dropped since late May in what we viewed as a technical correction, we took the opportunity to further raise our overweight in Japanese equities. At the same time, we reduced our exposure to Asia-Pacific. In the emerging markets, we initially decided to keep a market-driven passive underweight, which, however, we accentuated further after the most recent events, by actively selling positions. The purchases in Japan outweighed the reductions, resulting in a slightly increased overweight in equities.
Supposedly new scares and temporary exaggerations
Since mid-June, markets remained volatile and, for a while, dominated by some “new”, scary-sounding headlines – i.e. the headlines about the credit crunch in China, which were accompanied in part by comments that Beijing had adopted a “hard line” in its credit policy. However, China’s money and credit market regime has been relatively tight and volatile for several years now – a development that has also been closely accompanied by Chinese stock market weakness in recent years (chart 1, page 2 in the pdf). Therefore, reports about this allegedly new scare seemed overdone to us – as were the fears of a presumably premature reduction of the US Federal Reserve’s bond-purchasing program.
Fine-tuning our tactical investment positioning
Following the events after 14 June, we again re-examined the situation, and decided to uphold our basic positioning – i.e. maintain a significant overweight in equities, with a clear preference for the US and Japan, and a corresponding underweight in fixed income, particularly in high yield bonds (see graph on page 4 in the pdf). Furthermore, the recent events confirmed not only the bullish absolute trends (i.e. global bull market), but also some bearish relative trends (i.e. weakness of the emerging markets and Asia, see table and chart on page 3 in the pdf). Therefore, we decided to trim our emerging markets exposure further. However, this fine-tuning only marginally lowered our total equity exposure, partly as Japan’s stock market had already rebounded in the meantime. In fixed income, the relatively strong recent rise in yields in an environment of falling inflation expectations had gone too far in our view, and was ripe for a correction. We thus decided to increase our share of long-term US government bonds (however, the total weighting of the fixed income asset class changed only marginally). Indeed, long-term US government bond yields have started to fall somewhat since 26 June, the day we took the decision.
A case of “much ado about nothing” again?
Therefore, the events of the past few days have again confirmed our expectations, and we would again like to reiterate that the outlook remains constructive in our view, despite the occasional outburst of volatility. Moreover, the global “correction” that began in Japan at the end of May has probably ended there as well. Last but not least, it is also worth noting that the increase in volatility over the past month has been remarkably modest compared to all other “corrections” that we have observed since the bull market began in March 2009 (chart 2, page 2 in the pdf). Thus, in a few weeks from now, it could very well be that we will be looking back at the elevated excitement during the May-June market turbulence as a classic case of “much ado about nothing”.
Source: ETFWorld – LGT Capital Management
Subscribe to Our Newsletter
