The laggard argument to reposition part of asset allocation to Malaysia might be a mistake, according to HSBC’s strategists. Investors should actually be looking at more fundamental drivers to reconsider their exposure to the Asian economy, such a rising commodity prices, increased China investments in the region and political upside risk.
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…
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.
After the Brits, the French are making the headlines, not for the best. The market is slowly pricing the possibility that a far-right movement (Front National) might win at the next presidential election.
The risk here is that such a vote might provoke a sharp market correction that could have global ripple effects, since France is the 2nd largest economy of the eurozone and has been at the core of the European project since the 50s – something the Front National is openly questioning by promoting the « Frexit ».
According to SocGen’s strategy team, this is how the French market might react if French government yield were to rise slightly:
Short answer: lower returns.
Credit Suisse’s strategy team lists 10 reasons why investors should turn positive on Malaysia, in a report date March 15, 2017.
US 10 year yield is around 2.5% which is quite low. But if you take inflation into account, the situation is far worse. But real rates should be higher, based on the current fundamentals of the economy. This means that central banks should have ended QE some time ago already, but they can’t because they are prisoners of financial markets. They are just stuck in a mess they helped creating in the first place, because they never got the guts to stop banks around the world, and especially in the US, from doing stupid things.
Answer: it depends on the growth/inflation outlook, less so on the Fed’s balance sheet changes. Per UBS:
Currently, the proba is about 20% according to Morgan Stanley…
A couple of charts from HSBC about correlation and the macro/market backdrop since the US election that surprised so many observers…
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.