Domino effects Global Asset Allocation Strategy February 2019 - Nordea
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Domino effects Global Asset Allocation Strategy February 2019 Investments │ Wealth Management
February 2019
KEEP EQUITIES NEUTRAL
• Equity markets are currently rebounding, after the major
correction we saw in December. Policies, most importantly the
U-turn from Fed, has been very helpful and might break the
negative domino effects from the correction in Q4.
• Markets are already pricing in a lot of bad news after the sell-off,
which is why we continue to see strong performance at the same
time as almost all key data keeps disappointing.
• Global growth still seems decent and earnings are still growing,
but the negative trend in both needs to stop for this to become a
sustainable rally. We keep neutral weight in equities.
Domino effects EQUITY STRATEGY: Take profits in EM
• We take profit from our EM overweight and Europe underweight,
which has done quite well, bringing our regional allocation to
neutral.
• The valuation and earnings advantage of Emerging Markets has
waned, while we see risks tilted to the upside in Europe.
FIXED INCOME STRATEGY: Underweight HY bonds
• We stay conservative within the bond portfolio and keep HY
bonds in underweight and government bonds in overweight.
• We expect modest returns from bonds in 2019, even though
more cautious central banks are currently supportive for bond
markets.
This material was prepared by Investments |
Market performance & recommendations
ASSET ALLOCATION - N + Comments
Equity markets are rebounding after the selloff in December Equities
Fixed Income
EQUITY REGIONS - N +
North America
Europe
Japan
Asia excl. Japan
Latin America
Eastern Europe
Denmark
Finland
Norway
Sweden
EQUITY SECTORS - N +
Industrials
Cons Discretionary
Cons Staples
Health Care
Financials
IT
Comm. Services
Utilities
Energy
Materials
Real Estate
BOND SEGMENTS - N +
Government
Investment Grade
High Yield
Source: Thomson Reuters / Nordea
Emerging Markets
Current allocation Previous allocation
This material was prepared by Investments |
Growth outlook facing headwinds
DM growth slowing down vs. EM But the pace is likely to remain decent on aggregate
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• The global economic growth is facing headwinds. However, the pace is likely to remain decent and the markets have already priced in notable weakness.
• Estimates now point to above-potential expansion, but they normally fall further during the year. Overall, risks are tilted to the downside.
• We do not expect a global recession, meaning sub-2.5% growth. However, we are in a downturn, which makes navigating the financial markets harder.
This material was prepared by Investments |Earnings on the path to normalization, and with speed
Earnings growth normalizing Estimated earnings are downgraded with speed
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• 2018 earnings will be approx. 15%, but the more important question is if earnings will continue to grow in 2019. We think so, but at a much lower rate.
• Top-line growth will continue to get some support from consumption and investments, although margin pressure might start to take its toll on earnings.
• Worryingly, estimated earnings are falling rapidly. If the speed of downgrades continues, we will soon be in a earnings recession (if analysts are correct).Wages, financing cost and slower economic growth could weigh on margins
Margins normally correct in recessions, or due to external shocks Wage growth and financing cost should take its toll
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Earnings are revised down by the minute. One reason is the potential margin pressure, though we seldom see margins fall rapidly outside recessions.
• Higher wage growth, financing costs, and the strengthening of the USD last year are the most important factors that has potential to pressure margins.
• However, top line growth and pricing power should keep margins high, ergo our main scenario is low single digit earnings growth, but no recession.The last strong US earnings season for now
Impressive US earnings The stellar earnings growth is not only due to tax cuts
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Q4 earnings are on the path to grow over 14% y/y in the US. Fundamentals are solid, however tax cuts are still boosting earnings with ca. 8-10%-pts.
• Negative effects from the tariff dispute or dollar strengthening are unlikely to affect Q4 earnings in a material way, though there will be some drag.
• The sales growth rate is so far 5,6%, meaning the contribution from organic growth is considerable. All in all, so far a mixed earnings season in the US.Monetary headwinds are moving closer to a peak
Driven by Fed, major balance sheets are contracting Y/Y… …but China is leaning against the wind lately
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Policy rates: Fed pushed the pause button, fuelling a come-back for risk appetite YTD. ECB hikes are still a long shot, and PBoC is easing.
• Balance sheet: With max quantitative tightening in the US and balance sheet expansion in China, major balance sheet growth is getting less negative.
• Bottom line: Monetary headwinds could be peaking, but we don’t expect it will be the main driver for the next 6m.The key question is, whether damage already is done
Last call? Fed pausing to prevent recession risks… …but recession risks have already risen substantially
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Where 2018’s market focus was about monetary tightening per se, 2019 might be about its lagged effects and, hence, center around real growth concerns.
• Is the Fed’s U-turn timely enough to prevent a more severe downturn? We know that monetary policy affects the real economy with a significant time lag.
• The rate hikes already seen are pointing towards an inverted curve, normally a necessary but not necessarily sufficient condition for a US recession.Watch out for domino effects
Financial conditions could mean further downside risk for growth... …with tighter credit conditions a potential catalyst worth monitoring
-4 80
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-2 3 Best fit (predicted)
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0 50
Tightening
1 of financial
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2 conditions
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Easing of
4 20 -1 financial
conditions
10 -2
6
Net Net
0 -3 tightening
easing of
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credit of credit
-4 conditions conditions
-30 -10 10 30 50 70
ISM Manu. New orders, USA (rhs) US financial conditions (GS Index), Y/Y
US credit conditions for corporates (SLOOS)
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• For now, upside in risk assets seems capped by slowing economic momentum and therefore the lagged effect of last year’s monetary tightening.
• The downside, on the other hand, seems capped by Fed’s renewed dovishness.
• Domino effect is key: Tighter financial conditions could mean tighter credit conditions, higher funding cost, lower growth, putting more pressure on markets.Politics is adding to the noise
Political noise in US hurt consumer confidence Brexit has so far not affected UK equities more than rest of Europe
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Even though government is (temporary) reopened, the political noise in the US is weighing on consumer confidence, which could start weigh on economy.
• The trade spat between US and China is on idle for the moment, but the deadline of March 1 st is approaching. We think some kind of deal will be struck.
• In Europe, Brexit is in focus. So far, UK assets have done OK, but if the outcome becomes a hard Brexit that will probably change.
This material was prepared by Investments |Equities are far from expensive
Equities are priced below long-term average Global equities are already pricing in slower growth
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Global equities has derated close to 20% since January 2018, due to extremely strong earnings growth and negative equity price development.
• Weaker cyclical outlook, higher bond yields and outright recession fears are among the reasons for the derating.
• The derating can continue, but then equites would start to price in an economic recession, and we do not think a recession is likely in 2019.
This material was prepared by Investments |Economic divergence continues to set the scene for USD
USD get medium term support from US macro supremacy… …but stretched positioning will dampen the appreciation pressure
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Despite slower US growth, macro divergence between US and the rest of the world is still overall supportive for the US Dollar…
• …trumping Fed’s newfound patience. On the other hand, still stretched positioning will dampen the appreciation pressure.
• This should lead to weaker EUR, supporting European exporters. EM liquidity, on the other hand, continues to be an issue despite PBoC easing.
This material was prepared by Investments |Sentiment neutral with downside risks
Volatility lower, but at a (permanently?) higher level As the markets, sentiment has bounced back
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Along with markets, sentiment followed the bounce and is now around neutral levels. But as always, the devil is in the details.
• As the technical side was deeply oversold at the end of December, it’s now approaching overbought territory, meaning short term pull-back risk is higher.
• Volatility has also subsided, but at a high level, indicating that the market worries hardly are over. We expect sentiment to be jittery going forward.
This material was prepared by Investments |US corporate debt growing fast
Massive growth in IG debt, and worryingly in the lower rating classes Corporate debt almost on pre financial crisis level
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• The size of the US IG market has grown massively since the financial crisis, as the expansion and easy money have incentivized companies to lever up.
• The growth has been heavily skewed to the lower quality in IG, and the share of BBB is now 50% of total IG market, which increases the risk to investors.
• Not all drivers behind this are bad ones, but if the growth environment worsen and we enter a new downgrade cycle it will be more negative than normal.Fed ignited a rally in spreads
Big differences in yield levels Spread tightening in risky bonds after Fed ignited a rally
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• January has delivered a great rally in risky bonds, as sentiment improved when Fed eased their communication concerning coming rate hikes.
• However, global growth outlook remains murky, and tightening financial conditions weigh on outlook for HY. Hence we keep the defensive tilt in bonds.
• We expect modest returns from bond markets going forward, although more cautious central banks are currently supportive of bond markets.
This material was prepared by Investments |Take profits on a winning EM equity bet
EM equities have outperformed clearly since October… …but their earnings outlook is deteriorating
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• We take profits from our EM overweight and Europe underweight, which has done quite well, bringing our regional allocation to neutral.
• Both the valuation and earnings advantages of Emerging Markets have waned while the region has continued to outperform Europe.
• Europe, for its part, is a heavy underweight among investors and much political noise is already priced in. Hence, risks are tilted to the upside.
This material was prepared by Investments |Neutralize the cyclical tilt – increase Health Care
Defensives in the lead during the selloff Neutralize the cyclical tilt
Sector Recommendation Relative weight
Industrials Neutral -
Consumer Discretionary Neutral -
Consumer Staples Underweight -2%
Health Care Overweight +2%
Financials Neutral -
IT Neutral -
Communication Services Neutral -
Utilities Neutral -
Energy Neutral -
Materials Neutral -
Source: Thomson Reuters / Nordea Real Estate Neutral -
• Without going outright defensive in the sector strategy, we take a relative bet within the defensive sectors by reducing IT and raising Health Care.
• We reduce the weight in IT-sector to neutral, given the weaker earnings outlook and weaker guidance from leading companies like Apple and Samsung.
• Among the defensive sectors Health Care looks fundamentally most attractive and is typically a good late-cycle performer.
This material was prepared by Investments |February 2019
NEUTRAL ACROSS THE BOARD
• We take profits from our EM overweight and Europe underweight,
which has done quite well, bringing our regional allocation to neutral.
• Both the valuation and earnings advantage of Emerging Markets has
waned while the region has continued to outperform Europe.
• Europe is a heavy underweight among investors and much political
noise is already priced in. Hence, risks are tilted to the upside.
• The
. long rally has been particularly strong in North America
EQUITIES
NEUTRAL
Source: Thomson Reuters / Nordea
This material was prepared by Investments |Equity regions │ Returns (in SEK)
TAA SAA EXCESS
Total return 115% 97,8% 17,2%
Ann. Return 8,0% 7,1% 0,9%
This material was prepared by Investments |Equity regions │ February 2019
USA Neutral Europe Neutral Emerging Markets Neutral Japan Neutral
Recommended weight 40% Recommended weight 25% Recommended weight 15% Recommended weight 5%
Neutral weight 40% Neutral weight 25% Neutral weight 15% Neutral weight 5%
- Earnings outlook is deteriorating rapidly - Economic growth waning and earnings - Earnings outlook is weakening together - Earnings outlook worse than elsewhere
likely to follow with the rest of the world but not deteriorating as rapidly
- Valuation is the least attractive among
equity regions - Too much political noise and economic - Slower economic and trade growth are - Valuation is attractive and monetary policy
weakness already priced in, and valuation concerning, but supporting policies from supportive
- Extended dollar positioning is the key
is the most attractive among regions China will help
near-term risk - The link between yen and equity markets
- Monetary conditions remain supportive - Valuation no longer a clear support means more muted return prospects
Sweden Neutral Asia excl. Japan – Neutral
Recommended weight 15% Recommended weight 10%
Neutral weight 15% Neutral weight 10%
Eastern Europe – Neutral
- Industrial sector facing some headwinds
Recommended weight 2%
from the slump outside the US
Neutral weight 2%
- Earnings still healthy, no signs (yet) of
trade-related issues Latin America – Neutral
- Economy doing fine but could be Recommended weight 3%
negatively impacted by higher rates Neutral weight 3%
This material was prepared by Investments |USA │ Clouds gathering around the outlook
US earnings outlook deteriorating rapidly… …and valuation is extended in comparison
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Last year’s support from strong earnings and economic growth is fading rapidly. A particular concern is the deterioration in the heavyweight sector, IT.
• Valuation remains stretched compared to peers, putting added pressure on the US in a wobbly market.
• Trade war will weigh on all equity regions, but the US is likely to lose the least if things deteriorate. Put together, we prefer a neutral weight.
This material was prepared by Investments |Europe │ Raise to neutral on very sceptical positioning
Lower political risk, but equities are still pricing in bad news PMI’s have continued to weaken and signal significantly lower growth
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Despite leading indicators signalling further disorientation of the growth picture, and earnings estimates seem to high, we raise Europe to neutral .
• ECB members have now changed their language accordingly and political risks have eased. Brexit will still take headlines, but not likely affect EU equities.
• With investors being very sceptical on European assets, we start to see performance risk and therefore raise European equities to neutral.
This material was prepared by Investments |Finland │ Good value and earnings mean great prospects
Finnish earnings set to outpace peers… …and the usual valuation premium is gone
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• We upgrade Finnish stocks to overweight on the back of a strong earnings outlook, great dividends and attractive relative valuations.
• Finnish stocks got more than their share in the Q4 sell-off, priming them for a rebound. However, some of this has already taken place.
• Although there is a risk that analysts have not fully appreciated the impact of the global slowdown, this risk is no more pronounced than in Europe.
This material was prepared by Investments |Denmark│ Tactical outlook balanced, but more positive given the sector composition
A stronger dollar tends to support Danish companies earnings Despite fluctuations the relationship holds up well
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Danish stocks have underperformed global stocks during the January risk-on move despite earnings revisions being in favor of Danish stocks.
• Valuation remains a headwind but given shifts in FX and earnings momentum is a positive. We await the earnings season to confirm a possible trend shift.
• We stick to a neutral position for Danish stocks, though we are slightly more positive on the sector level given large share of in Health Care in the index.
This material was prepared by Investments |Norway │ Valuation is back to neutral, and outlook is balanced
Violent turn from support to headwind from oil prices Norwegian equites are no longer expensive
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Oil prices has been a tailwind so far this year, but as the outlook is mixed, the support could fade.
• The outlook for the Norwegian economy is solid and will support earnings growth, however we don’t expect positive effects from weaker NOK this year.
• Valuation has turned from very stretched to fair. The outlook for Oslo Børs is balanced, and we remain a neutral weight.
This material was prepared by Investments |Sweden │Still a challenging environment for industrials
Industrial-heavy Sweden is dependent on the global momentum Swedish equities lagging behind global
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• As previously flagged for, the EZ manufacturing slump and weaker Chinese data has weighed on Swedish industrials
• The recent bounce in Swedish industrials appears premature given the worsening Chinese industrial cycle, stay Neutral
• The Swedish economy is doing well, but the housing sector remains a risk, and could continue to weigh on the large banking sector
This material was prepared by Investments |Emerging Markets │ Downgrade to neutral – weaker Chinese cycle will weigh on EM earnings
Chinese slowdown add pressure on already weakening EM exports Brazilian equities are pricing in too much economic improvement
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• EM earnings are highly correlated with EM exports. Both should come under increased pressure as the Chinese import cycle deteriorates further.
• US-China trade deal remains an upside risk, but any sentiment boost should be short-lived. The global trade slowdown is not caused by the trade conflict.
• Driven by Bolsonaro optimism, Brazilian equities have made a classic overshoot relative to economic fundamentals. Downgrade EM to neutral.
This material was prepared by Investments |Japan │ Uninspiring story, triggers needed (and few are on the horizon)
Growth had a terrible Q3 and prospects for 2019 are bland Earnings are also sluggish, a weaker yen could help
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Growth is trailing off to some extent with pressure form both investments, consumption and exports. Short term, it’s hard to see positive triggers.
• Earnings is facing a similar story, with estimates following global earnings down, but from a lower starting level. Valuation is OK, but hinges on earnings.
• Foreign investors have pulled large amounts YTD and buyer of last resort is BoJ. Positioning is thus another headwind for Japanese equities.
This material was prepared by Investments |Sectors│ Returns (in SEK)
EXCESS
This material was prepared by Investments |Industrials│ Stuck between trade and Capex
Trade worries weigh on Industrials Capex plans should provide a boost
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Industrials have underperformed since early 2018, with mostly trade worries weighing on the sector.
• As industrials are sensitive to the economic cycle we still remain cautious on the fundamental side. Sceptical positioning poses an upside risk.
• Upside risks to this sector includes capex, potential infrastructure package in US and a trade deal with China. We remain positively biased but still neutral.
This material was prepared by Investments |Consumer Discretionary │ A tale of two sectors
Consumer Discretionary has done ok in 2018 But valuation is stretched
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Consumer Discretionary is torn between the waning brick-and-mortar business and the booming online retail business, making the outlook hard to assess.
• The sector usually performs well in an early-cycle environment which was distorted by the US tax-reform in 2018 – but effects are waning.
• As the cycle matures the labour-intensive part of the sector will struggle. While online retailers will continue benefit from higher sales - we remain neutral.
This material was prepared by Investments |Consumer Staples │ Macro headwinds and fundamental problems
Valuations remain elevated in the sector Consumer Staples are very much yield sensitive
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Consumer Staples experienced relatively flat performance in 2018, as earnings got hurt by higher raw material prices and higher freight costs.
• Competition in the sector is increasing as consumer preferences are changing, where especially E-commerce is changing the landscape.
• Earnings are lackluster, valuations are stretched and the sector faces major headwinds from increasing rates. Underweight.
This material was prepared by Investments |Healthcare │ M&A activity in big pharma is accelerating
Healhcare typically performs well in late cycles High drug prices has lead to pollical pressure
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Major M&A activity in the sector, as a series of deals involving big pharma acquiring cheap biotech companies sparked off over the Christmas
• Renewed focus from Trump on curbing prices could weigh, but so far the pressure is on the middlemen instead of big pharma companies.
• Healthcare is typically a good late cycle sector. We have turned more constructive on Healthcare, and recommend overweight.
This material was prepared by Investments |Financials │ Cheap, for a reason
Growth outlook can drag financials further Italian politics are weighing on EU banks
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• As financials have underperformed, they are now very cheap versus history, and the banking sector is split between US and EU banks.
• European banks also struggle with several other things among the weak macro momentum and political uncertainty in Europe.
• European risks and regulation are a headwind, while US deregulation provides a tailwind. Put together, we believe neutral is the best position.
This material was prepared by Investments |IT │ Earnings outlook is weak
US companies expect strong growth in investments Extremely strong global earnings growth
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• IT has been sold off, led by higher rates and skepticism for future earnings growth, fueled by profit warnings from both Apple and Samsung.
• The cyclical outlook has deteriorated, though both consumption, capex and the structural outlook (digitalization) still support the sector.
• Protectionism and trade war are obvious risks, and the risk/reward is no longer supportive of an overweight. We cut to a neutral weight.
This material was prepared by Investments |Communications Services│ Estimated earnings are holding up
Stocks moved from IT & Consumer Discretionary into Telecom Biggest names in the new sector
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Earnings estimates has fared much better for the communication sector than for the rest of the cyclicals, and that is a support.
• The new sector includes companies that facilitate “communication & offer related” content and information through media.
• It still hard to judge this new sector, due to the lack of historical data, and we continue with an neutral weight.
This material was prepared by Investments |Utilities │Improved earnings outlook
Less pressure from higher yields Better earnings outlook for Utilities
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• There is signs of overcapacity in the USA, which is not good for pricing power in the sector. We are also running at low levels of capacity utilization.
• Earnings revisions has however turned positive, and the growth outlook for 2019 is improving.
• Utilities are highly levered and pay high dividends. If rates go higher it could hurt Utilities through higher costs, but this pressure has recently dropped.
This material was prepared by Investments |Energy │ Bear market for oil
The falling oil price is taking its toll on earnings Booming US shale production
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Positive output surprise from both US and OPEC, US waivers for the main Iranian oil importers and technical headwind led to a bear market in oil.
• Structurally, the outlook is mixed due to the battle between the rise in shale production vs. underinvestment in traditional oil (depletion of traditional wells).
• Earnings estimates has been slashed, despite the recent uptick in oil prices, the risk is high and we stick to a neutral weight on the sector.
This material was prepared by Investments |Materials │ Higher risk from Chinese steel production weigh
Metals prices have weighed on the sector’s performance Earnings tend to outperform towards the end of the cycle
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Materials tend to perform well towards the end of the cycle, but risks have risen from Chinese steel production, and we keep our neutral weight.
• Despite recent rebound, China-worries continues to haunt the sector. Going forward, Chinese easing could provide a boost, but we wait for the evidence.
• Valuation is relatively attractive, but estimated earnings are being slashed, so we do not think valuation will be in the driving seat for now.
This material was prepared by Investments |Real Estate │Strong fundamentals but limited upside from yield
Tight relationship with rates Tight labour markets supports earnings in the sector
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• The real estate sector experienced strong performance towards the end of 2018, in the backdrop of the correction and risk off moves.
• Whereas strong economic momentum in the US and tight labour markets support the sector, the strong relationship with rates are expected to hold.
• We don’t see significant evidence for significant lower rates from here, but fundamentals are strong, and the combination warrants a neutral position.
This material was prepared by Investments |February 2019
Central banks take a step back
• We recommend to underweight high-yield bonds and overweight
government bonds in the bond portfolio.
• Government bonds offer low yield, but they provide stability for the
portfolio.
• Moderating global growth has made central banks to take a more
cautious approach to monetary tightening. This supports bonds.
Growth concerns have pushed yields lower
FIXED INCOME
UNDERWEIGHT
Source: Thomson Reuters / Nordea
This material was prepared by Investments |Fixed income markets │ February 2019
Corporate bonds Neutral High-yield bonds Underweight Emerging market bonds Neutral Government bonds Overweight
- Decent economic growth, good level of - Spread for high-yield bonds widened - A dovish turn from the Fed and better FX - Return prospect is modest due to low yield
earnings and solid balance sheets still forcefully at the end of 2018. Moderating performance has been supportive for EM
- Government bonds provide diversification
support corporate bonds. growth and tighter financial conditions in bonds this year
and stability to the overall portfolio
the global economy could cause
- Increasing government bond yields were a - Global growth indicators have been falling,
continued challenges for high-yield. - Euro zone inflation outlook is still modest
headwind for corporate bonds last year. but technical factors provide support to
and central bank does not want to
We expect government yields to increase - High-yield bonds are still supported by EM bonds.
jeopardize economic growth, which has
in a gradual manner and there’s less solid corporate earnings and low expected
- We estimate risks regarding EM bonds as moderated. Investor expectations
headwind in 2019. defaults.
balanced. High yield appears attractive, regarding ECB rate hikes are pushed
- Returns from corporate bonds will remain - Cautious comments from Federal Reserve but tighter USD financial conditions could further into the future.
low, but they offer stability to the portfolio helped spreads to compress in January. cause volatility.
Cash Overweight
- Negative euribor rates mean that return is
still basically zero for cash
- Cash provides liquidity to the overall
portfolio and it also has an opportunistic
role if attractive investment opportunities
open up in the markets
This material was prepared by Investments |EUR IG │ Continued low yields
Yield has increased from the lows due to spread widening Resolution on Italian budget provides support for financial corporates
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Decent economic growth, good earnings and solid balance sheets all support European investment grade corporate bonds.
• Corporate bond credit spreads widened considerably last year as euro zone economic growth moderated and ECB bond buying was terminated.
• Returns from investment grade credits will remain low, but within the low risk investment universe, European corporate bonds offer stability.
This material was prepared by Investments |US IG │More cautious Fed gives some relief
Currency-hedge eats most of the yield in US IG Investment grade yield increased considerably in 2018
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Corporate credit fundamentals are still acceptable in the US along solid corporate earnings and robust economic growth
• Increase in government bond yields has been a great headwind for IG. Fed indicating pause in monetary tightening supports IG performance prospects.
• We favour European investment grade credits compared to US ones due to the hedging cost and a shorter duration in European bonds
This material was prepared by Investments |High-Yield │ 2019 started with a rally, but more challenging times ahead
Yields and spreads increased sharply at the end of last year Forecasts point towards a very low default rate
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• We recommend to keep high-yield bonds underweight in the bond portfolio. Moderating global growth and tighter financial conditions weigh on outlook.
• High-yield spreads tightened forcefully in January after cautious comments from the Fed and helped capital market to reopen for bond issuance.
• High-yield bond issuer credit metrics are still supported by solid corporate earnings. Also default estimates point towards below historic default ratios.
This material was prepared by Investments |EM bonds │Attractive yield, but the environment is challenging for EM assets
Valuation remain attractive, even after spread tightening Positive effect from FX fading, and growth indicators not supportive
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• A dovish turn from the Fed and better FX performance has been supportive for EM bonds this year, after showing resilience through end of last
year.
• But, global growth indicators have been falling, and as US rate markets have already priced out rate hikes in 2019, the positive effect on FX will
likely fade.
• The environment is not very bullish for EM bonds, although we see some positive conditions like valuation and technical factors, hence we
keep neutral.
This material was prepared by Investments |Nordea Global Asset Allocation Strategy Contributors
Global Investment Strategy Strategists Assistants
Committee (GISC) Andreas Østerheden Victor Karlshoj Julegaard
Senior Strategist Assistant/Student
Leif-Rune Husebye Rein Andreas.osterheden@nordea.com Victor.julegaard@nordea.com
Chief Investment Strategist Denmark Denmark
leif-rune.rein@nordea.com
Norway Sebastian Källman Mick Biehl
Strategist Assistant/Student
Michael Livijn sebastian.kallman@nordea.com Mick.Biehl@nordea.com
Chief Investment Strategist Sweden Denmark
michael.livijn@nordea.com
Sweden Ville Korhonen Amelia Marie Asp
Fixed Income Strategist Assistant/Student
Antti Saari ville.p.korhonen@nordea.com Amelia.Marie.Asp@nordea.com
Chief Investment Strategist Finland Denmark
antti.saari@nordea.com
Finland Espen R. Werenskjold Frederik Saul
Senior Strategist Assistant/Student
Witold Bahrke espen.werenskjold@nordea.com Frederik.Saul@nordea.com
Chief Investment Strategist Norway Denmark
witold.bahrke@nordea.com
Denmark
Sigrid Wilter Slørstad
Senior Strategist
sigrid.wilter.slorstad@nordea.com
Norway
This material was prepared by Investments |DISCLAIMER
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equities and bonds and in similar securities. To provide the best possible advice we have gathered all our competences within analysis and strategy in one
unit - Nordea Investment Center (hereafter “IC”).
This publication or report originates from: Nordea Bank Abp, Nordea Bank Abp, filial i Sverige, Nordea Bank Abp, filial i Norge and Nordea Danmark, Filial af
Nordea Bank Abp, Finland (together the “Group Companies”), acting through their unit Nordea IC. Nordea units are supervised by the Finnish Financial
Supervisory Authority (Finanssivalvonta) and each Nordea unit’s national financial supervisory authority.
The publication or report is intended only to provide general and preliminary information to investors and shall not be construed as the sole basis for an
investment decision. This publication or report has been prepared by IC as general information for private use of investors to whom the publication or report
has been distributed, but it is not intended as a personal recommendation of particular financial instruments or strategies and thus it does not provide
individually tailored investment advice, and does not take into account your particular financial situation, existing holdings or liabilities, investment knowledge
and experience, investment objective and horizon or risk profile and preferences. The investor must particularly ensure the suitability of his/her investment as
regards his/her financial and fiscal situation and investment objectives. The investor bears all the risks of losses in connection with an investment.
Before acting on any information in this publication or report, it is recommendable to consult one’s financial advisor. The information contained in this report
does not constitute advice on the tax consequences of making any particular investment decision. Each investor shall make his/her own appraisal of the tax
and other financial advantages and disadvantages of his/her investment.
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