Firmer but fragile Global Asset Allocation Strategy May 2019 - Nordea
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Firmer but fragile Global Asset Allocation Strategy May 2019 Investments │ Wealth Management
May 2019
KEEP EQUITIES NEUTRAL
• The impressive rally in risky assets continued in April. The
support from central banks, which started with Federal Reserve
in the US, has been the main driver.
• Developments in global economic data is still on the weak side,
but we are starting to see signs of a near term bottom.
• Monetary policy, some economic green shoots and potential
support from investor flows provide continued support for risky
assets. However, with the strong rally this year, markets seem to
have already discounted a lot of good news, while downside
risks for the economic and earnings outlook are still present.
Stick to neutral.
Firmer but fragile EQUITY STRATEGY: Keep overweight in Europe
• We recommend to stick to an overweight in Europe. Valuation is
attractive, and we expect fundamentals to pick up.
• Japan is uninspiring on all counts, especially earnings, and we
keep the underweight.
• Within equity sectors we underweight Industrials on the back of
weakness in the cycle, and overweight Health Care. Hence we
keep a defensive stance.
FIXED INCOME STRATEGY: Lift HY to OW
• We recommend to increase risk slightly by lifting high yield
bonds to overweight. While we don’t see any big spread
contraction, carry should be decent over government bonds.
• Overall, we still expect modest returns from bonds in 2019, as
spread and yield levels are low in a historic context.Market performance & recommendations
ASSET ALLOCATION - N + Comments
Equity rally continued in April
Equities
Fixed Income
EQUITY REGIONS - N +
North America
Europe
Japan
Emerging Markets
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
Emerging Markets
Source: Thomson Reuters / Nordea
Current allocation Previous allocationSome signs of a near-term bottom in global growth
Broadly speaking, the economic outlook has improved a notch Outside the US, data has started to exceed expectations
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Global economic growth has started to show signs of a near-term bottom. However, there are still significant risks to the downside.
• Indeed, looking at data outside the US, there are some early indications of a synchronised rebound while US activity continues at decent levels.
• Troublingly, however, trade growth continues to sag and the uncertainties there and around the German manufacturing cycle linger.Signs of stabilization in the earnings outlook
Stable 2019 growth expectations (but helped by lower 2018 hurdle) Fewer down revisions
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• 2019 earnings expectations are still being revised down, but improvement in the pace and a decent start to the US Q1 reporting provide some hope.
• However, with the very strong markets so far this year, improvements in the earnings outlook are most likely discounted in todays prices.
• Rising wage growth could pressure margins. Improvement in earnings probably requires healthy top line growth and continued improvement in macro.Monetary policy – less tailwind but more dovish surprises cannot be ruled out
Recently, markets have guided Fed’s expected rate path lower Financial conditions are (again) easy, and volatility has fallen back
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Almost all (large) central banks now has an easing bias and there might be more dovish surprises lined up.
• Talks about inflation overshoot (price level targeting) has intensified from Fed members and has also reached ECB (despite still being far from their target).
• Despite the latest rebound in interest rates, we expect them to stay muted going forward, with little upwards pressure aided by possible dovish surprises.Politics lingering on
The pound is very sensitive to news regarding Brexit Troubling signals from trade, a deal will improve the outlook
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Political noise has decreased lately. The US/China trade conflict is at the negotiating table as both sides obviously want some kind of deal.
• A second-order risk is that if a a deal is reached, US will turn to Europe, where a trade truce has been at play since last summer. Late May is the next stop.
• Brexit is by no means out of the picture. Currently, the ball is in UK:s court but the deadlock in Parliament continues. Stay tuned.Valuation no strong driver at the moment
As markets are grinding higher, so is valuation Some “recovery” in yields as well, but they’re still extremely low
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• The re-rating continues as the market grinds higher. While not outright expensive, valuation does not provide support at current levels.
• With the earnings uncertainty, the case for further re-rating weakens after the rally. Currently, we don’t see valuation as a strong driver.
• On the bond side, yields have turned higher lately but they are still extremely low. In relative terms, the picture between equities and bonds is unchanged.Still stretched sentiment levels, but investors are warming up to the rally
Technical indicators at high levels Bulls are clearly bashing the bears
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• The happy mood in markets continues. Several sentiment/technical indicators are at high levels, volatility is low, and greed certainly reigns at the moment.
• Sentiment switched in January, investors did not. YTD, flows into risky assets have been negative and positioning light. This has changed lately though.
• More real money entering the market could sustain the rally, but we see the greed levels as worrisome and a short term risk at the moment.Oil prices have staged a massive rebound, but the outlook is cloudier
Spot oil prices have picked up, but longer futures more muted A significant proportion of world production at risk from geopolitics
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Oil prices have staged a strong rebound together with other risky assets, rising about 40 % this year. This has supported earnings in the energy sector.
• Much of this is due to supply disruptions due to the civil war in Libya, US sanctions against Iran and the political instability in (and sanctions on) Venezuela.
• Going forward, however, the upside potential is more limited as OPEC + Russia do not want an excessively high price and much is priced in already.Increase high-yield bonds to overweight
Very strong performance in all bond markets lately Yield and spread on high-yield bonds have been decreasing
Source: Thomson Reuters Source: Thomson Reuters
• Central banks have put monetary tightening on hold. This has supported bonds, and creates a better environment for credits going forward.
• Bond market returns have been very good this year as yields have dropped significantly. We expect the rate of performance to calm down.
• We increase high-yield bonds to overweight. With a benign economic environment, low default levels and decent carry, they should outperform govvies.Stick to overweight in Europe and underweight in Japan
Good returns from all regions this year Earnings showing signs of stabilisation
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• We recommend an overweight in Europe as investors have given up on the region while we expect fundamentals to start picking up.
• Japan, for its part, is uninspiring on all counts aside from valuation which anyway is more attractive in Europe.
• The biggest risk to this view is protracted weakness in European manufacturing and European politics.Sector strategy: Overweight Health Care
We see latest price action in the health care sector as an overreaction Keep a defensive stance in the sector strategy
Sector Recommendation Relative weight
Industrials Underweight -2%
Consumer Discretionary Neutral -
Consumer Staples Neutral -
Health Care Overweight +2%
Financials Neutral -
IT Neutral -
Communication Services Neutral -
Utilities Neutral -
Energy Neutral -
Materials Neutral -
Source: Thomson Reuters / Nordea Real Estate Neutral -
• We have a defensive stance in the sector strategy by underweighting industrials as a play on weakness in the industrial cycle. Overweight Health Care.
• A renewed policy focus on drug prices, and Bernie Sanders announcing a plan for a Medicaid for all in April was the trigger of the sell off.
• We expect this to be a short term overreaction but expect volatility up till the US elections on campaign rhetoric - not only in Health Care.Nordea Global Asset Allocation Strategy Contributors
Global Investment Strategy Strategists Assistants
Committee (GISC) Andreas Østerheden Victor Karlshoj Julegaard
Senior Strategist Assistant/Student
Andreas.osterheden@nordea.com Victor.julegaard@nordea.com
Michael Livijn Denmark Denmark
Chief Investment Strategist
michael.livijn@nordea.com Sebastian Källman Mick Biehl
Sweden Strategist Assistant/Student
sebastian.kallman@nordea.com Mick.Biehl@nordea.com
Antti Saari Sweden Denmark
Chief Investment Strategist
antti.saari@nordea.com Ville Korhonen Amelia Marie Asp
Finland Fixed Income Strategist Assistant/Student
ville.p.korhonen@nordea.com Amelia.Marie.Asp@nordea.com
Witold Bahrke Finland Denmark
Chief Investment Strategist
witold.bahrke@nordea.com Espen R. Werenskjold Frederik Saul
Denmark Senior Strategist Assistant/Student
espen.werenskjold@nordea.com Frederik.Saul@nordea.com
Sigrid Wilter Slørstad Norway Denmark
Chief Investment Strategist
sigrid.wilter.slorstad@nordea.com
Norway
Kjetil Høyland
Chief Investment Strategist
kjetil.hoyland@nordea.com
NorwayDISCLAIMER Nordea Investment Center gives advice to private customers and small and medium-sized companies in Nordea regarding investment strategy and concrete generic investment proposals. The advice includes allocation of the customers’ assets as well as concrete investments in national, Nordic and international 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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