Merrill issued its latest Fund Manager Survey last week, right after the sell-off in equity markets. The message to take out is: don’t buy on dips (well my view is that you always have to think long term, understand the fundamentals of any asset class and have a view on valuation, otherwise, don’t invest at all – but that’s not the point here, I think this survey is useful to gauge market sentiment).
I attended a quite interesting presentation yesterday organized by Schroder on emerging markets. Two fund managers presented on equities and debt. The head of EM debt absolute return strategies had a very interesting analysis of the current environment.
Howard Marks published a new memo dated Jan 23 and there are some interesting remarks regarding the current environment. Continuer la lecture de « Howard Marks: Price And Value Are Still The Name Of The Game »
Supportive macro backdrop so far makes the case for investing in risky assets, but valuation-wise, harvesting decent returns on a risk-adjusted basis is harder. At least, that’s BofAML’s strategists views.
Goldman recommends investors to « remain pro-risk » going into 2018, meaning overweight equities, be neutral on credit and underweight bonds. Continuer la lecture de « Remain Pro-Risk – Goldman Sachs »
Morgan Stanley keeps a bullish call on equities in cross asset 2018 outlook published today, but ups government bonds to « Equal-Weight » and lowers credit to « Underweight ». Timing will be tricky. The bank also prefers EM debt. Continuer la lecture de « Morgan Stanley Favors Equities in 2018, Ups Bonds »
Per Bank of America Merrill Lynch report published Nov 21:
« Altice shares have lost 50% of their value post results, while the CDS on the holding have increased by 300bps. Management took action with: 1/ the resignation of the CEO and the return of Patrick Drahi to full control of operations, 2/ admission of poor execution in France, now the #1 focus, and 3/ a priority on debt reduction, involving noncore assets and towers disposals. However, ATC also significantly rebased its midterm expectations on France. Although the steps taken should comfort credit holders, we think the case for the equity is balanced, with long term upside on execution, content monetization and domestic consolidation, but unclear valuation support on our reduced forecasts, and a recovery that remains largely dependent on external competitive forces. Unlike Glencore in 2015, we don’t see material valueenhancing options to drive mid term outperformance and downgrade to Neutral with a PO of €11. Our credit analyst Nick MacDonald is positive on the credit »
Getting a decent return from a diversified portfolio is getting more difficult by the year. According to Morgan Stanley’s calculations, « a traditional 60/40 equity/bond USD portfolio will see 4.2% per annum over the next decade, while the same in EUR fares only slightly better at 4.7%, and GBP at 4.9%; only the JPY 60/40 portfolio sees above-average expected returns, driven by elevated equity risk premiums. »
Volatility is the most disturbing factor in financial markets and it’s something people should always keep an eye on. Measured by popular metrics like VIX or VSTOXX, it’s assimilated to the « fear indicator » of investors.
Looking at the long past of the US equity market (S&P 500 in chart below), you can see that volatility goes in regimes that can change widely but rely mainly on macro environment (expansion/recession) and it’s impact on the psychology of investor (P/E or valuation).
Volatility in equity market in perspective
Better growth, low inflation. It’s the perfect backdrop for risky assets. But in a late cycle environment, one of the driver of financial markets people should always be fearful about is the « fear of missing out », especially when the rise in stock market accelerates and relies more on multiple expansion than fundamental improvement.
« En Marche! », that’s an easy catch for brokers and a good way to have investors be more pro-risk in their asset allocation now that the political landscape has cleared for the best, thanks to Macron’s win at the French presidential election…
SocGen’s view on Macron’s win last night, in a nutshell:
« What next? Newly elected President Macron is set to shortly appoint a PM and an interim government. Attention will now turn to the legislative election on 11 and 18 June.
Rates: EGB spreads are collapsing, more because of a desperate search for yield with few near-term risks, rather than any election relief per se. Bunds are exposed as tail risk falls.
FX: We see limited upside just now for EUR/USD, given the overshooting vs rates and the risk of profit taking. EUR/JPY should gain, HUF and PLN should gain more.
Credit: Markets may tighten still after the final vote of the French presidential election. Nonetheless, thoughts should quickly turn to whether CSPP can end soon.
Equity: Macron winning the election was expected and so mostly priced in. Eurozone markets should outperform: we favour our long-term calls on Italy (FTSE MIB) and Banks (SX7E).
Equity derivatives: Equity vol collapsed after the first round, and we see little scope for lower moves. The focus should shift quickly to the general elections and then to the German election.
Technicals: CAC40 on the verge of confirming a paradigm shift. »
« House’s view: don’t miss inflation »
What would happen in the event of an unexpected French presidential race outcome (Le Pen/Melenchon in the 2nd round of the election) ? Nothing good, according to many market observers.
Citi has been trying to figure out what this would mean for financial markets. No surprise there, the unexpected outcome might be bad.
Investors hold firm to their Eurozone equities despite growing worries about the outcome of the French presidential election, according to the latest poll on investor positioning published by Bank of America Merrill Lynch.
Investors consider a « Le Pen Win » might produce a 5-10% market correction, but the real risk would be a Europe disintegration in the case of « Frexit », which would have deeper and far more negative implications.
Another self-explanatory table, but overall bonds are the only asset class that provide some sort of risk diversification during equity markets drawdowns…
With interest rates being negative for most of the bonds traded and issued around the world, the opportunity cost of cash is very high. But it’s probably the most valuable yet contrarian asset to own to help diversify risk in a portfolio.
Falling asset classes correlation might be perceived as a good thing: lower correlation means it’s getting easier to diversify risk in a portfolio.
The problem is that you have to understand what drives lower correlation among asset classes.
Per MS’s report dated Jan 3rd 2017:
« 2016 saw the 3rd best annual performance for US High Yield on record. Commodities posted their best year of returns since 2009, a feat all the more impressive given early losses. It was a surprisingly ho-hum year for performance in global equities (+8.5% in MSCI ACWI), global rates, and the USD (+4.3%), with those numbers masking big divergences by region, style, and the 1st-versus-2nd half of the year. We also note that global correlations have plunged, driven largely by the breakdown in rates correlation to risk assets and regional correlations within equities. »
Per today’s report:
« As equities rallied and bonds sold off, our measure of risk appetite reached a new post-crisis high, but it has started to retreat more recently. Near-term, we think growth optimism will persist and keep risk appetite strong. We are long US equity near-term as it should be a direct beneficiary of growth optimism, but expect optimism to moderate eventually. Later in 2017 we are looking to rotate from S&P 500 to EM (specifically EM-ex-China) where risk appetite has lagged and we expect the growth picture to be more supportive. We also like Europe and Japan on a 12-month horizon in our asset allocation. Both of these lagged global equities in 2016, but should continue to be beneficiaries of reflation and have supportive monetary policy backdrops. »
On a 12 month horizon, GS is overweight Equities, with a bias towards Europe and Japan, but underweight US equities and Neutral on Asia ex-Japan.
The bank underweights Government bonds and is Neutral on credit (yet with a preference for US High Yield and Euro High Yield).
It’s also Overweight Commodities and Cash.