House View, November 2019
- While neutral, we are cautiously optimistic on global equities, encouraged by a lack of investor complacency. We remain focused on companies that provide attractive, sustainable dividends and companies with pricing power.
- The unprecedented volume of negative-yielding government bonds presents a challenge for fixed-income investors and explains our underweight position in them. In corporate bonds, there are still opportunities in the cross-over space between investment and noninvestment grade issues.
- We are tactically positioned for limited US dollar weakening against the yen and select emerging-market currencies. We continue to have an overweight stance on alternative investments, particularly private equity, with opportunities also in real assets.
- We are overweight liquidity, but are keen on short-term alternatives to cash.
- The spike in oil prices following attacks on Saudi oil facilities proved short lived, and the feeling again predominates that an abundance of US shale oil is about to hit the market – yet we also seeing an unprecedented decline in US drilling activity.
- The drivers of US dollar strength – interest-rate and growth differentials – are fading. With the Fed having more room to cut rates than other major central banks, we see scope for the dollar to weaken moderately in the months ahead.
- In spite of lacklustre earnings growth and demanding valuations, developed-market equities have powered ahead, supported by cautious investor positioning and relatively supportive news on trade and Brexit, among other reasons.
- Emerging-market equities have shown signs of clawing back some of their underperformance this year, with earnings expectations stabilising. Some lowering of trade tensions has been helping, as have developments in individual markets (including Brazil, where the Bovespa index hit an all-time high in late October).
- While ‘value’ stocks continued to do well overall in October, healthcare, technology and industrials were the best-performing sectors, supported by relatively strong Q3 results. Consumer discretionary was also strong, with luxury stocks outperforming.
- Relative Value hedge-fund strategies offer low beta to equities and are able to provide steady arbitrage-based returns. One major opportunity for them stems from the transition away from the LIBOR as the global benchmark lending rate.
- Fed activism, including renewed purchases of T-bills in reaction to a sudden rise in repo rates, has helped steepen the US Treasury yield curve. While we have a neutral stance on US Treasuries, we still see scope for 10-year US yields to decline again by year’s end.
- Investment-grade credits continue to offer interesting yield pick-up. Euro credits are supported by renewed European Central Bank asset purchases, but we have an underweight stance on US high yield.