Communication on current asset allocation view

While there were little fundamental news flow with Chinese markets closed for the New lunar year and Fed Chair Janet Yellen to deliver her semi-annual testimony later this week, risk assets continued to sell-off sharply. Again, technical damages signal that global markets should not immediately renew with the previous bull trend. Our cautious approach, reflected in a further reduction in equities leading to a slightly underweight exposure on equities vs. our benchmark weights, illustrates our current view on global markets.

We acknowledge a weaker global growth environment at the turn of the year but we expect growth momentum to improve somewhat in the coming quarters. The US economy is currently experiencing a soft patch and Candriam expects US GDP growth to reach 1.9% this year, followed by 2.4% in 2017. Hence, our medium-term fundamental view remains constructive, also based on a weaker dollar, which strengthens commodity stocks and takes some pressure off emerging market currencies. In this respect, we note that markets do not price any Fed funds rate hike before 2017. Interestingly, emerging market assets do actually outperform in recent weeks. We capture this outperformance through exposures on EM debt, both in local and in hard currencies.

In the US, two thirds of S&P500 companies have now published earnings for Q4 2015. Overall, 77% of earnings were reported ahead of expectations (which have been cut in advance), 1% have been in line, while 22% missed them. The key take-away from this earnings season is that there are no new alarm bells ringing. However, financial markets have other fish to fry, switching from one theme to another.

Over the past months, focus has shifted from one asset class to another, always putting emphasis on the downside. As such, high yield credit markets came under pressure in December as one US-based specialist fund experienced liquidity problems. Focus has quickly shifted to currency markets and the struggle faced by Chinese authorities to alleviate pressure on offshore Renminbi depreciation. Commodity market pressures have intensified in January as the excess oil supply pushed the price of oil (Brent) down by 25% in just three weeks. Since then, attention has shifted to the European banking sector, where current prices value Eurozone banks at close to 50% of their book value.

In our thinking, we expect markets to revisit some of those themes in the weeks ahead, in particular the balancing of the oil market as the current excess supply glut is not expected to disappear overnight but at some point in Q2 2016. However, we are prepared to see new themes to emerge over the weeks. Political themes, such as the Brexit debate and the upcoming US presidential election are likely to grab more attention – and potentially fuel new fears. The March 1st Super Tuesday emerges as an important date. We will also observe signals from currency and commodity markets: a consolidation in commodity prices, coupled with a weaker US dollar would be an important step to stabilize risk assets.

In terms of positioning, we have decided to reduce tactically our stance on Eurozone and US equities, leading to an overall slight underweight exposure on equities vs. the benchmark weightings. We keep long exposures to the Japanese Yen and to commodity-related currencies such as the Canadian dollar and are now overall short on the US dollar as we expect a more dovish Fed compared to the dot plots published in December. In this context, we are also comfortable with our exposure on emerging market debt.