The downwards trend of interest rates should be finished for the time being. Long-term AAA government bonds hold the risk of low real yields and of price losses in the medium term. Equities continue to be favourable and remain overweighted…
Swisscanto (Thomas Härter – Head of Investment Strategy)
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The long-standing trend to cuts in interest rates in the case of government bonds graded as being of high quality should have arrived at a turning point. We are therefore implementing a slightly below average duration in the bond portfolios compared with the benchmarks and at the same time somewhat reducing the investment quota in the asset allocation. At the longer end, interest rates could rise, not only on account of better (expectations for) economic activity, but also because the credit risk of even the best borrowers increases if less credit-worthy countries have to avail themselves more and more of financial aid. In the USA there is also the long-term dangerous over-expansion of the Fed’s balance sheet. America is the only country in the world that continuously gives full throttle in its monetary and fiscal policies. A weak US dollar and rising inflation rates in the long term are accepted as “collateral damage”. Investments in AAA government bonds are highly risky at present with regard to future yields that have been adjusted to take account of inflation. This is true to a particular extent also for the bonds of Europe’s problem countries in which we remain greatly underweighted for the time being. However, we are in a constantly positive mood for corporate bonds, including also in the high-yield sector.
There is at present a widespread scepticism towards the countries on the European periphery and clearly prefers investments in emerging markets. The latter currently show all in all a considerably better fiscal situation than the industrial countries. What is admittedly problematic is that they are not taking advantage of the “favourable situation” to achieve primary surpluses and build up reserves. Hence, at the next downturn, the emerging markets’ fiscal situation will (also) clearly deteriorate. So everything is not as super as it seems to be. Therefore in 2011, investors should not forget the favourable valuations of European equities for sheer euphoria about emerging markets.
The most recent price gains have additionally increased the already overweighted equity quota. We are adjusting the quota to the market movement. Shares are favourably valued on account of the profit expectations and compared with government bonds. As at the end of November, the MSCI World Equity Market measured by trend profits showed an undervaluation of 18%.
In our opinion, a moderate rise in interest would still not endanger the present up-turn on equity markets. The unsolved Euroland crisis up to now prevents us from implementing an even greater equity overweight.
Apart from the European equity market, we see good opportunities in Japan and the USA. On account of the market valuation, the balance sheet quality and the profit expectations, we are reckoning with further company takeovers, redemption of stocks and increases in dividends. We still prefer the cyclical sectors to the more defensive companies, and favour small caps over large caps in all markets. At a branch level, we prefer the capital market to the consumer goods industry and banks to insurers. We are reducing the pharmaceutical sector, but not the relative weight of biotechnology securities, and strengthening the positions in the semiconductors sector.
On the currency side, we are keeping CHF, EUR and JPY underweighted against the commodities currencies CAD and AUD, and also against the SEK. The GBP is clearly undervalued.
Source: ETFWorld
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