As a result of the uncertainties in connection with developments in the Arab world, profits are being taken on equity positions. The equity share is being reduced mainly in favour of commodities and Norwegian bonds…
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More than usual, markets are currently under the influence of geopolitical events. In view of developments in North Africa and the Middle East, investors are interested in scenarios with regard to the future performance of the world economy and financial markets. Admittedly, it is a fact that the economic importance of North Africa and the Arab peninsula is low, even among the emerging markets. In times of crisis, however, the large oil deposits in this region mean that market players begin to focus on the oil price. Depending on the extent of the oil price increase, there is a more or less massive flight from risky investments into such assets that are regarded as being “safe havens” (e.g. gold or government bonds from countries with a top credit rating). One of the most frequently cited scenarios is the spilling-over of the unrest to Saudi Arabia, the country with the largest oil deposits. Another negative scenario envisages acts of war between Islamic states and Israel. In both cases, the effects on the oil price and thus on financial markets would be drastic. The consequences could be comparable with the situation in August 1990, when Iraqi troops invaded Kuwait, unleashing the first Gulf War. At that time, the world stock market slumped by almost 30%, whereas investable commodities rose by some 50%. We think there is a probability of about 15% for such a scenario to materialise. At all events, a sharp rise in the oil price would come in a period of sluggish recovery experienced by the Western economies. However, if it soon becomes apparent that tensions will ease again, investors’ attention will be redirected to the fundamentally good economic data and company results.
In view of the uncertainties, Swisscanto is reducing its overweight in equities. In return, we are increasing our commitment in CHF money market papers, bonds and commodities. In the case of bonds, a focus will be on buying Norwegian government papers in NOK. Along with overweighting commodities, this will serve the purpose of partially hedging the investments against a sharp rise in the oil price. According to our valuation models, the stock markets as a whole (MSCI World) are now just slightly undervalued. On the other hand, we still regard equities from the euro zone as very inexpensive. More caution is called for with regard to securities from the emerging markets since they have become rather expensive. In the case of bonds, we set great store by a below average duration, thus restricting the risks of losses due to a general increase in interest rates. We continue to prefer corporate bonds to government bonds. We are still reserved regarding papers from PIIGS countries, as no convincing solution for the debt problems faced by these countries is in sight. In our currency strategy, we have overweighted the “commodity currencies” AUD, NZD as well as the Scandinavian currencies NOK and SEK, whereas we are more cautious in the case of CHF, EUR and JPY.
Source: ETFWorld – Swisscanto (Thomas Härter – Head of Investment Strategy)
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