Analysis from Colin Graham, Head of Multi Asset Solutions, Robeco
Porfolio movements
We see a supportive environment for equities at the moment, however valuations in certain areas such as US equities, high-yield and US dollar remain eye-wateringly high. We have closed our underweight position in Europe excluding the UK given its cheap valuations and solid performance from the banking sector. The political concerns around the snap French election called by President Macron, provides this opportunity to implement as euro sceptics dust off the arguments about Eurozone stability. We will be monitoring the situation as it evolves and look to take advantage the volatility.
The bottoming out of global manufacturing has driven positive M2 growth, even before any rate cuts and the expected weaker euro. We have closed our long commodities position as we saw moves that could not be reconciled with macro and political events. Some of these pricing anomalies have closed and we are now waiting for oil to find a base post the OPEC+ meetings.
The barbell between growth and quality defensive in equities continues to pay dividends, although the recent outperformance of utilities has been unexpected. The bottoming out of the manufacturing sector is leading us to remove the underweights in cyclicals such as Eurozone. We still believe that small caps will struggle in the higher for longer interest rate environment, especially in US.
In fixed income, we are cautious on the direction of the lower grade credit, but short duration sovereign and investment grade bonds remains preferred as curves remain inverted. US exceptionalism remains the major factor in US support despite the over valuation. The Japanese Yen looks cheap based on long run valuation measures so we are long versus other currencies where interest rates cuts have began such as the Swiss Franc.
Monetary policy
Inflation inflation inflation – it is everywhere and the data is no exception!
Global monetary policy has pivoted to loosening, with the Bank of Canada (BoC) and the European Central Bank (ECB) cutting rates last week, however, the effects will be muted due to the ‘higher for longer… and longer’ expectations in the US.
The recent labor data in US remains solid and the disinflationary trajectory remains downwards (albeit at slower than expected rate at the start of year). With the FED’s mantra of data dependence, the small cracks appearing in leading data indicators will be difficult to pay heed to without changing the rhetoric. Full employment and corporate margins will continue to support US consumer spending, US economic growth and indeed the global economy.
As we expected, the Fed held rates this week, signalling just one rate cut to come later this year. Barring any economic mishap, the Fed’s dual mandate of employment and inflation (as measured by the Misery Index) is nearing historic low levels – so nothing to see here. While the Fed’s communications may be jinking and head-faking but the direction is unchanged and has been for some time.
On the other side of the pond, the ECB appears to be painting itself into a corner with a rate cut. The rise in risk premium caused Macron’s surprise in calling a French election has focussed investors’ concerns on debt sustainability and Eurozone cohesion. Going ahead of the FED when global manufacturing is bottoming, there remains strong US growth with a lagged effect and the energy shock firmly in the rear-view mirror could result in a policy mistake once the noise has fallen around France.
