After many important equity markets had reached highs in the past month, rather weak early economic indicators triggered profit-taking. We too are easing off the gas and reducing the overweight in American stocks so we can take advantage of temporary blips. The overweight in European shares is being maintained….
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Swisscanto Investment Update June 2013
National economies continue to develop very differently across the globe. In the US, expectations are being met; Employment market developments and consumer confidence are actually somewhat better than expected. This triggered discussions about a premature end to the extremely relaxed US monetary policy and the comprehensive Treasury purchases by the Fed. We are of the view that the Fed will continue with its quantitative easing up until 2014 and will carefully prepare its exit from its purchasing programme with market-oriented communications.
Something is happening in Europe
Although the eurozone is still in recession, there are now rays of hope. The most important one being that the eurozone’s current account is now markedly positive. Important for capital markets: in all likelihood, the poisoned chalice of a downgrading of Spain’s national debt to the level of high-yield bonds has now passed – as the ratings agencies have quite clearly bowed to political pressure. Slightly weaker economic indicators came from China again; we are assuming that the prevailing growth forecast for this year (+7.9 per cent) is positioned slightly too high. The reassessment of Chinese growth is negatively affecting the entire commodities sector at the moment as well as the classic commodity currencies. In Japan, the comprehensive stimulus measures of the central bank did produce the desired effects on the stock markets and the currency for a short time, but we are not counting on any lasting effect.
The ‘major rotation’ is yet to come
In view of the low interest rate environment, the expectation is increasingly built upon there being a ‘major rotation’ from bonds to equities – or this might already be underway. In fact, top government bonds recently reported tangible price losses. Whether this is already indicative of the much-cited major turning point for interest rates remains to be seen. Renewed uncertainties such as an unexpected ruling by the German Constitutional Court on 12 June concerning ‘The European Central Bank’s Bond Purchase Programme’ could again boost the demand for safer government bond bonds.
Corporate bonds valued high
Swisscanto is still of the opinion that bonds will face price losses in the medium term. The big swing towards equities anticipated by the market has not yet been borne out by marked flows of capital. As an alternative to premium government bonds, bonds from the peripheral countries of Europe, corporate bonds and emerging market bonds continued to be preferred. As a result of this continuing high demand, which shows no sign of abating, corporate bonds in particular continue to be highly valued. A reduction of existing overweights to a neutral position would actually be advisable here. In view of the continuing excess demand, we have refrained from doing so up to now.
Dividend strategies can make gains from the rotation
After the price increases of the past few months, the undervaluation of European shares is no longer so strongly pronounced. From a technical perspective, the share markets have received backing for this. We are therefore maintaining our overweight in European shares. For those who shied away from moving into equities as part of a renunciation of overvalued government bonds, dividend strategies which focus not only on high dividend yields, but also on stability and growth of dividend payments, offer a practical solution in their bid for returns.
Source: ETFWorld – Swisscanto
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