investment traffic lights

There have been only a few tactical changes we’ve made over the past month, and our quarterly strategy meeting will be held in a few days where new 12-month strategic objectives will be set.

In recent weeks, we have seen riskier segments of the market, particularly stocks and corporate bonds, perform strongly again, even as Treasury yields have risen and expectations for interest rate cuts have waned. One reason for this is likely that markets are pricing in the risk of a U.S. recession. When the economy is strong, businesses can more easily tolerate high interest rates. At the same time, it will be difficult for market participants to rein in the market riding the wave of AI excitement. Index-oriented investors in particular will clearly lag the market if they deliberately underweight large-cap U.S. tech stocks or major European stocks in the luxury, pharmaceutical, and technology sectors. And the momentum is likely to continue, as various indicators are still not showing the values ​​typically observed just before a frenzied price rally begins. Since the beginning of the year, the best-performing investment style for stocks has been momentum. And investors are still more likely to jump on the bandwagon than jump off it. But the big risks that are currently being ignored are sure to come back to market attention later this year. These risks include the U.S. budget deficit and constraints on its refinancing, the European Union’s fiscal burden due to national defense and decarbonization concerns, and China’s growth difficulties and potential deflationary tendencies.

2.1 Bonds

The market has moved closer to our view in recent weeks, significantly reducing the number of rate cuts it had priced in this year. The ECB and Federal Reserve are expected to cut interest rates three times this summer.

national debt

After what appears to have been an exaggerated (or rather premature) drop in yields in the fourth quarter of 2023, government bond yields have risen significantly again this year, and this trend is far from over. It looks like there isn’t. However, we expect the yield curve to normalize over the medium term, primarily due to lower short-term interest rates. Expect less movement on the long end. However, for German government bonds, we also expect long-term bond yields to rise slightly. Therefore, we still think he has the most attractive range of 2 to 5 years. However, in the United States, we see a greater risk that active debt issuance due to high fiscal deficits could impact long-term interest rates.

corporate bond

In our view, corporate bond risk spreads have already tightened significantly, especially in the high-yield segment, so there is no chance of further upside for corporate bonds in the US, and we see little chance of that happening in Europe as well. Masu. However, yields still look attractive. We expect high yield spreads to widen slightly. Although there has been a noticeable decline in interest rates over the past six months, neither inflation nor government bond yields have been able to stop rising. While the slightly improved economic outlook certainly helps, markets are expected to remain volatile in the near term.

emerging market

The backdrop for emerging market sovereigns is quite constructive as dollar strength is likely to have peaked and US yields are expected to remain flat or decline. However, given the US presidential election at the end of the year, volatility may increase. We primarily focus on lower-rated countries where refinancing capacity appears to be compelling. Political stability and progress on economic reform remain key for high-high sovereigns. Spread reduction is possible among so-called “distressed stocks” (spreads above his 1,000 bps) and defaulted issuers. We continue to prefer euro-denominated bonds due to their attractive yields. I also like Asian Credit. HY spread is still at high levels compared to the past 10 years, but IG is trading at the lower end of his 10-year band. China remains weak. Other countries are doing better. The technical support comes from the fact that we expect net issuance in emerging markets to be negative for another year.

currency

We have not made any changes to the currency and do not expect any clear movement in any particular direction. While the dollar’s relative strength against the euro should be coming to an end after recent better-than-expected European economic data, the opposite is happening in the United States.

2.2 Stocks

There is a basis for the stock market’s euphoria. The US economy is holding up well, even with some absurdly high budget deficits. Japanese companies are achieving a certain level of profit growth. The European economy, excluding Germany, is gaining momentum. Last but not least, the U.S. technology and communications sector has delivered very good earnings growth, and earnings estimates have been revised upwards, so valuations are changing, especially compared to his 2000s. Doesn’t seem unreasonably high. However, there is a sense that markets are currently weighing the positives far more heavily than the negatives, particularly the risk of an escalation of war on Europe’s borders. However, given the current dynamics, resisting that momentum will not be easy. It may take some disappointment from the AI ​​sector to end this party.

us market

Earnings season marks a turning point for the United States. Overall S&P 500 profits rose 8% in the fourth quarter of 2023, but telecoms’ profits rose 49%, technology’s profits rose 22%, and discretionary consumption’s profits rose 29%. . The so-called Magnificent Seven belong to these three areas. Excluding profit growth, the overall market’s 8% increase becomes -2%. While the market now appears willing to trade at even higher prices, there remains skepticism as to whether the company will be able to deliver the growth required by its current valuation over the next 12 months.

european market

In Europe as well, unlike in the US, a few large-cap stocks drive the overall market, although they are diversified across various sectors. We still think Europe’s valuation discount to the US is overstated and sees upside potential given better-than-expected macroeconomic indicators.

german market

Although Germany’s economy currently lags behind the rest of the continent, the Dax was able to hit a new all-time high. We are less positive on the Dax compared to Europe’s Stoxx 600 as a whole due to Germany’s growing competitive disadvantage and relatively poor sector composition.

Japan

In February, the Nikkei Stock Average exceeded its 1989 high of 40,000 yen for the first time. Companies are reporting strong numbers, profit forecasts are being raised further, and the yen continues to weaken. We maintain a positive outlook.

emerging market

Emerging markets (EM) present a complex picture. In terms of valuations, China appears to have bottomed out after a long period of weakness, although government-led purchases in the domestic market are also providing some support. However, economic policy headwinds remain strong, and Beijing’s – quite understandable – concerns about overstimulating the economy and creating excess capacity are not well received by some investors. Not yet. We now have to wait for anxious individual consumers to start spending again.

We prefer other countries in Asia such as India and Indonesia. Emerging markets should be helped overall by the fact that the US dollar is unlikely to appreciate from current levels and US Treasury yields should be close to the upper end of the trading corridor. However, weak demand in China will reduce support for commodity-intensive industries, limiting the scope for reassessment of commodity exporting countries.

2.3 Alternatives

real estate

Is the neighbor’s grass greener or as white as snow? With multifamily REIT returns in the rearview mirror, we wanted to highlight some differences we see between the U.S. and Canada. In the US, slower demand and higher levels of new property deliveries are likely to hamper same-property net operating income this year (overall growth of less than 1% based on company guidance). These effects will be felt across the country, but even more so in the Sunbelt, where cities like Austin and Nashville are outpacing new supply and could be hit the hardest. In contrast, Canadian apartment companies expect same-property net operating income to grow in the high single-digit to low-double digit range (think 8-12%). Canada is benefiting from incredibly high demand and a lack of supply of new apartments, despite low turnover and suppressed rents in some regions.

Money

In our view, the price of gold will continue to be closely linked to U.S. Treasury yields and therefore exhibit similar volatility. However, strong demand from central banks and retail consumers should continue to support gold prices above USD 2,000.

oil

Brent crude oil prices continue to hover between $70 and $80 per barrel, with prices limited by the availability of excess production capacity. As we expected, OPEC+ extended production cuts into the summer. However, growth in non-OPEC regions is offsetting these reductions. Demand stimulus from China is not yet expected. Natural gas prices in both the US and global LNG supplies continue to be closely tied to weather. There is ample supply on the market and storage capacity is limited, so prices should come down.