Global Asset Allocation Strategy (ENG) April 2019 M_watermark
.pdf
vk.com/id446425943
Global yields: End-cycle fears causes race to the bottom
Core bonds: Hunt for capital preservation instead of hunt for yield
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Amount of negative yielding bonds, globally
10Y German government bond yield
Source: Bloomberg/ Macrobond / Nordea
Signs of caution: Lower rated bonds lagging behind the recent rally
Source: Thomson Reuters / Nordea
•As expected, the end of Fed Q/T has not really been an issue for duration: amount of negative-yielding bonds reached highest level since 2017 in March.
•Driver: Dovish central banks caused by rising end-cycle fears. Case in point, credit spreads were roughly sideways in March, reflecting cautious investors.
•Squaring richness in government bonds with elevated macro risks leads us to stay neutral government bonds, with a continued bias towards US duration.
vk.com/id446425943
Lift Europe to overweight and downgrade Japan to underweight
Good returns from all regions this year |
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Earnings showing signs of stabilisation |
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Source: Thomson Reuters / Nordea |
Source: Thomson Reuters / Nordea |
•We recommend upgrading Europe to an overweight as investors have given up on the region while we expect fundamentals to start bottoming out.
•Japan, for its part, is uninspiring on all counts aside from valuation which is more attractive in Europe. Notably, recent money flows do not reflect this.
•The biggest risk to this view is protracted weakness in European manufacturing while the trade war and Brexit could impact both regions to some extent.
This material was prepared by Investments |
vk.com/id446425943
Go slightly defensive in the sector strategy
The industrial cycle under pressure |
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Raise Consumer Staples and lower Industrials |
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Sector |
Recommendation |
Relative weight |
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Industrials |
Underweight |
-2% |
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Consumer Discretionary |
Neutral |
- |
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Consumer Staples |
Neutral |
- |
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Health Care |
Overweight |
+2% |
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Financials |
Neutral |
- |
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IT |
Neutral |
- |
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Communication Services |
Neutral |
- |
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Utilities |
Neutral |
- |
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Energy |
Neutral |
- |
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Materials |
Neutral |
- |
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Real Estate |
Neutral |
- |
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•We take a slightly more defensive stance in the sector strategy by lowering industrials to underweight and raising Consumer Staples to neutral weight.
•Despite the fact that yields have come down, there is still a case for Consumer Staples as the fundamentals looks better relative to other sectors.
•Industrials are lowered as a play on a further short term risk of weakness in the industrial cycle with also investment activity stagnating lately.
This material was prepared by Investments |
vk.com/id446425943 |
April 2019 |
OVERWEIGHT EUROPE, UNDERWEIGHT JAPAN
• We recommend upgrading Europe to an overweight 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 is more attractive in Europe. Notably, recent money flows do not reflect this.
• The biggest risk to this view is protracted weakness in European manufacturing while the trade war and Brexit will impact both regions to an extent.
The long rally has been particularly strong in North America
EQUITIES
NEUTRAL
Source: Thomson Reuters / Nordea
This material was prepared by Investments |
vk.com/id446425943
Equity regions │ Returns (in SEK)
TAA |
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SAA |
EXCESS |
Total return |
115% |
97,8% |
17,2% |
Ann. Return |
8,0% |
7,1% |
0,9% |
This material was prepared by Investments |
vk.com/id446425943
Equity regions │ April 2019
USA Neutral
Recommended weight |
40% |
Neutral weight |
40% |
-Earnings outlook is deteriorating rapidly
-Valuation is the least attractive among equity regions
-Extended dollar positioning is the key near-term risk
Europe Overweight
Recommended weight |
30% |
Neutral weight |
25% |
-Too much political noise and economic weakness already priced in, and valuation is the most attractive among regions
-Monetary conditions remain supportive
-Economic and earnings outlook likely to start picking up soon
Sweden Neutral
Recommended weight |
15% |
Neutral weight |
15% |
-Industrial sector facing some headwinds from the slump outside the US
-Earnings still healthy, no signs (yet) of trade-related issues
-Economy on a slowing path but level still decent. Higher rates would be a negative
Emerging Markets Neutral
Recommended weight |
15% |
Neutral weight |
15% |
-Earnings outlook is weakening together with the rest of the world
-Slower economic and trade growth are concerning, but supporting policies from China will help
-Valuation no longer a clear support
Asia excl. Japan
Recommended weight |
10% |
Eastern Europe |
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Recommended weight |
2% |
Latin America |
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Recommended weight |
3% |
Japan Underweight
Recommended weight |
0% |
Neutral weight |
5% |
-Earnings outlook worse than elsewhere, and support from the economy is elusive
-Valuation is attractive and monetary policy supportive
-The link between yen and equity markets means more muted return prospects
This material was prepared by Investments |
vk.com/id446425943
USA │ Clouds gathering around the outlook
US earnings outlook deteriorating rapidly… |
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…and valuation is extended in comparison |
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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 |
vk.com/id446425943
Europe │ Raise to overweight – a contrarian buy on over-pessimism
Positioning still seems stretched but less that earlier |
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Surprises are looking less negative compared to other regions |
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Source: Thomson Reuters / Nordea |
Source: Thomson Reuters / Nordea |
•We recommend raising Europe to overweight based on over-pessimistic analysts and increasing risk-appetite (less political risk) in our models.
•Drivers: Prospects of a stabilization in leading indicators (even some seems to undershoot), stable earnings estimates will tempt investors.
•It goes without saying that we do not expect a “no-deal” Brexit which would meaningfully affect investors sentiment towards European assets.
This material was prepared by Investments |
vk.com/id446425943
Emerging Markets │ Weaker Chinese cycle will weigh on EM earnings
Chinese slowdown add pressure on already weakening EM exports |
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Brazilian equities are pricing in too much economic improvement |
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Source: Thomson Reuters / Nordea |
Source: Thomson Reuters / Nordea |
•EM earnings are highly correlated with EM exports. Both should come under increased pressure with the weakening Chinese import cycle.
•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. Don’t overstay your welcome.
This material was prepared by Investments |
vk.com/id446425943
Finland │ Good value and earnings mean great prospects
Finnish earnings set to outpace peers… |
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…and the usual valuation premium is gone |
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Source: Thomson Reuters / Nordea |
Source: Thomson Reuters / Nordea |
•We keep the overweight in Finnish equities on the back of a good 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 |