With economies reopening more and more and loose fiscal and monetary policy continuing to underpin the post-pandemic recovery (notably in the US), we see room for further gains by risky assets and higher bond yields.
According to our latest asset allocation monthly, the cyclical recovery should gain traction later this year and broaden beyond the US to other major economies. Cyclically sensitive assets (e.g., commodities, Japan, and US value) are set to perform well in the second half.
In terms of allocation, our net equity exposure remains long. We are also long risky assets such as commodities and emerging market (EM) local currency debt. Our portfolio diversifiers include a long position in gold.
We are long EM equities given our view that earnings growth in China/Asia will be supported by dynamic local technology and e-commerce sectors as well as a strong high-end manufacturing sector. South Korea and Taiwan equities should benefit. Japanese stocks are well placed to profit from a broadening global recovery, a cash-rich corporate sector and still low valuations.
We are bullish on the US. Accordingly, we are long US value stocks. In the eurozone, we are long EMU small caps versus large caps. Both positions reflect our view that valuations are attractive.
We have taken a short position in US government bonds and TIPS given the potential for real yields to rise from their historically low levels. This trade should be a good hedge to the long risk exposures in multi-asset portfolios. We are underweight EMU bonds. Here too, we expect yields to rise.
We are long EM local debt since we expect spreads to fall as investors search for yield. As for EM currencies, we see plenty of room for appreciation, especially if the US dollar resumes its downtrend.
Check out our asset allocation monthly for our views on:
Please note that this publication will take a break for the summer. The next issue will be published in September.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
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