The continuing abundance of liquidity and lack of alternatives in bonds are driving up stock prices. In addition, improved economic and earnings prospects for the coming year mean that equities remain attractive as an asset class …
Swisscanto Investment Update December 2013
We are expecting increased yields from bonds; this is particularly the case in Switzerland, where we are significantly shortening bond duration.
The global economic prospects for the coming year are good. The eurozone is on track for achieving accelerated growth. However, the large discrepancies between Germany, the main driver of growth, and the other European countries will take a long time to disappear, particularly when it comes to unemployment. In the USA, which once again experienced a reporting season with strong corporate results, there are initial signs that things might not go quite so well in the future as they are currently. It is most likely that companies’ operating margins are already close to reaching cyclical highs. The USA is also currently seeing its highest wage increases in four years, despite wages still being at a very low level. However, while US companies have been delivering very promising figures which account for the price increases on US stock markets, throughout Europe we are still waiting for across-the-board increases in earnings.
Swiss bonds: a sure bet on duration
The postponement of tapering has taken pressure off the bond markets; however, we expect increasing yields in the medium term. In Switzerland, so much confidence has again been placed in bonds that there was an unusually high yield difference of 180 basis points compared to US treasuries at the long end. As we expect this yield difference to close soon, we have made the tactical decision to drastically reduce the duration for Swiss bonds. Corporate bonds continue to be rather expensive, and the market has largely dried up. Here, there is a danger of a correction in the case that investors begin to reposition themselves for tapering, which most now expect will take place in March 2014. Last month, the European Central Bank (ECB) surprised everyone with its interest rate reduction, which it justified by citing the reduced inflation rate in the eurozone (currently 0.7%) but which probably had more to do with making necessary refinancing operations even easier for countries in the European periphery.
Currencies: positions maintained
The Swiss franc continues to be overvalued compared to the US dollar and the euro. Accordingly, we are maintaining our short positions in this currency. We are not changing our long positions in US dollars or Scandinavian currencies. Looking ahead to the US budget discussion set to take place early next year, there will most likely be a change in the US dollar position at the end of December.
Equity markets: rotation and risk premium as price drivers
In November, key stock markets once again reached new historical highs. At these unexplored altitudes, the air is getting thinner for further stock market rises. However, equities are continuing to benefit from the rotation from bonds to equities that has been initiated. In the current low-interest environment, fairly valued equities still have a considerable risk premium as compared to bonds. In our mixed model portfolios, the allocation of US equities is being slightly increased, whereas Swiss bonds are again being decreased. Stress tests that are currently being performed for these portfolios have shown that an interest rate increase of 100 basis points would not lead to price losses overall due to the current underweighting in bonds and the degree of diversification employed. The Swisscanto model portfolio is implemented in practice via our mixed portfolio funds.
Source: ETFWorld – Swisscanto
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