Waiting for a recharge - Nordea Asset Allocation... · Waiting for a recharge • Overweight Europe with investors being too pessimistic, dovish package from ECB should be a catalyst,

Global Asset Allocation Strategy

September 2019

Investments │ Wealth Management

Waiting for a recharge

Waiting for a

recharge• Overweight Europe with investors being too pessimistic, dovish

package from ECB should be a catalyst, but a continued

deteroriation in manufacturing indicators poses a risk to this call.

• Japan appears cheap, but is still uninspiring on all other

accounts, especially earnings. We keep the underweight.

• We keep the defensive stance in the sector strategy. UW IT and

Industrials, OW Consumer Staples and Health Care.

EQUITY STRATEGY: Keep overweight in Europe

FIXED INCOME STRATEGY: Raise EM bonds to OW

• August proved to be a challenging month with increased

uncertainty around the economic cold war between US and

China. This weighs on the economic outlook which still not has

stabilized. Hopes/expectations on central banks are high, as are

worries about monetary impotency. Fiscal stimulus and falling

yields could provide an economic boost, but has yet to show up.

• Market tension runs high in this environment, where sentiment

can turn on a day. Clarity around trade and monetary/fiscal

policy has the potential to recharge markets going forward.

• Risk/reward is thus limited short term, and we keep our neutral

stance between equities and fixed income.

KEEP EQUITIES NEUTRAL

September 2019

• We recommend increasing the weight in EM bonds and lower

high yield on better risk return and what we see as a mature

credit cycle. Still a decent carry compared to government bonds.

• Overall, we expect modest returns from bonds for the rest of

2019, as spread and yield levels are low. Though it is still an

important part of the overall portfolio composition.

Market performance & recommendations

Central banks lifted equity markets again

Current allocation Previous allocation

ASSET ALLOCATION - N + Comments

Equities

Fixed Income

EQUITY REGIONS - N +

North America

Europe

Japan

Emerging Markets

Denmark

Finland

Norway

Sweden

EQUITY SECTORS - N +

Industrials

Cons Discretionary

Cons Staples

Health Care

Financials

IT

Comm. Services

Utilities

Energy

Materials

Real Estate

BOND SEGMENTS - N +

Government

Investment Grade

High Yield

Emerging MarketsSource: Thomson Reuters / Nordea

Some pick-up lately across the regions, but still early days

Macro risks have increased, but easing may help

Source: Thomson Reuters / Nordea

The slowdown has been visible in relative valuation


• Weaker macro has not pushed stocks lower this year, as falling bond yields have done the heavy lifting on relative valuation.

• The global manufacturing sector is tiptoeing around recession due to dampened capex, continued US/China-worries and a deteriorating profit outlook.

• However, services are still holding up, consumer spending remains robust and easier financial conditions and fiscal stimulus will help going forward.

However, real yields are very low this timeInverted yield curve has historically often been followed by recession

Flat yield curve signals recession?

Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea

• The yield curve has a good track record in predicting recessions. However, this time around real rates have dived lower and should stimulate growth.

• If the yield curve signal turns out to be true, the implications for markets are still uncertain short term.

• The time lag between the signal and the recession in highly variable and equity markets have historically peaked on average 6 months after the signal.

Let’s try again: Central banks liquidity squeeze reversing Monetary impotence? Yield curve inversion after Fed cuts

• The Fed is cutting rates and the ECB is expected to ease policy in September. Is the punchbowl being refilled? Markets are increasingly skeptical.

• US 2-10’s yield curve inverted after the Fed started cutting. Yield curve inversions means tightening financial conditions – the opposite of what the Fed wants.

• Bottom-line: Monetary easing necessary, but not sufficient to reduce recession risks. Effectiveness is reduced amid geopolitics trumping central banks.

Central banks: Refilling the liquidity punchbowl might not be enough


Volatility tends to increase in the run-up to and during recessions

Keep a cautious stance, but stay invested


Some recessions are more painful for markets than others


• Outside of financial crises, stock markets return back to previous peaks relatively fast, and investors should stay invested through the cycle.

• The most reliable investment outcome around recessions has been that markets perform very well after the trough. Before the peak, it’s more 50-50.

• As volatility increases in the run-up to and during a recession, diversification within defensive building blocks becomes increasingly important.

The Bermuda triangle | Fed can mitigate but not insure against geopolitics

Fed

US-China conflict

Economy / markets

• “Cross currents” stemming from the

geopolitical landscape could weaken

the economic outlook forcing the Fed to

cut.

• Should Trump escalate geopolitical

conflicts further the risk is that easier

monetary cannot insure against this

risk.

• The US / China conflict seems to be

dictated partly by the economic /

financial damage of the conflict i.e.

should outlook deteriorate the ”Trump

Put” is probably getting in place.

• Should Fed ease significantly

(insurance cuts, QE) the risk is that

Trump sees a opportunity for escalating

further without creating too much

economic damage.

The economy and the market react to both the

dovish tones from central banks and US/China

conflict. We have to incorporate geopolitics and

monetary response into the equation:

• The market has priced a benign outcome.

Markets has priced Fed rather than the

potential negative effects from geopolitics.

• Accommodative monetary policy can offset

some the of negative “cross currents”, but

has limits should geopolitical tensions

escalate

Insurance?

”Fed put”

”Trump put”

Earnings expectations will continue to slide

2019 estimates still being revised down. 2020 starting now?


• Earnings revision ratios are still negative, and 2019 earnings estimates are in a steady downtrend. Reality check for 2020 starting now; expect downgrades.

• Margins seem to turn down. Long term positive drivers from globalization, interest rates and QE, demographics and tax cuts are loosing steam or reversing.

• Leading indicators for earnings like PMIs, ISM and global trade point to further downgrades. A mild 2019 earnings recession is probably already discounted.

Margins under pressure in all regions


This material was prepared by Investments |

Valuation: Will TINA lead to repricing?

• PB-ratio for MSCI All Country is a bit higher than average from 2004. The same conclusion would apply for the equivalent PE-ratio over the same time period.

• Relative to bonds, equities seem as cheap as ever. The steep fall in rates and the lack of alternatives might lead investors into equities, causing a repricing.

• However, low rates give a bleak signal for growth, geopolitical uncertainties should increase the risk premia and there are downside risks to earnings estimates.

PB-ratios globally a bit higher than average ..


.. but relative to bonds equities look as attractive as ever (S&P500)

Trade worries rattle markets


Trade threats rattle markets, but are clearly not the only game in town

• Tariffs and tariff threats have plagued markets from at least the start of 2018. With its ebbs and flows, the situation has deteriorated.

• While the direct economic impact is relatively modest, the fear of a broader tech/currency war and deterioration in sentiment has put a brake on markets.

• Timing the turns of the trade war is next to impossible. Hence, we think for now the best action is to consider it an ongoing risk.

Many political risk factors loomingEconomic policy uncertainty is rising

Trade currently overshadows other geopolitics

Source: iStock Source: Thomson Reuters / Nordea

• With trade as the centre piece, it’s easy to overlook other potential geopolitical drivers. A more lasting trade truce is most likely after the 2020 election.

• Brexit date is fast approaching, and so far both sides haven’t budged, increasing the risk for a hard Brexit. An extension of the deadline is our base case.

• Italy is mired in (yet another) political crisis. Hong Kong, Iran and possibly North Korea can evolve into larger crisis. Buckle up.

EM hard FX offers attractive risk reward as USD is well supportedYield curve flattening will eventually tighten credit conditions

• We reduce credit risk, moving HY from overweight to neutral amid a slowly turning credit cycle and structurally higher geopolitical uncertainty.

• We do not expect an outright credit crisis in light of policy makers aversion towards volatility, but se potential for further spread widening from here.

• Within risky bonds, EM hard currency debt seems more attractive to us, with EM central banks all easing and EM macro fundamentals relatively sound.

Credits | Overweight EM bonds – reduce High Yield amid a slowly turning credit cycle

Source: Thomson Reuters/ Nordea Source: Thomson Reuters/ Nordea

Earnings are better outside of Japan

Stick to overweight in Europe and underweight in Japan


Good returns from all regions this year


• Keep the overweight in Europe as investors have given up on the region and ECB is expected to stimulate meaningfully in September.

• Japan, for its part, is uninspiring on all counts aside from valuation which is more attractive in Europe.

• The biggest risks to this view are protracted weakness in European manufacturing and European politics.

Keep the defensive stance in the sector strategy

Sector strategy| Stick to the defensive stance

Weak indications from the semi-cycle indicates downside to IT EPS


• We keep the defensive tilt in the sector strategy by underweighting IT and Industrials while overweighting Consumer Staples and Healthcare.

• Continued weakness in the global cycle warrants a defensive stance, and the weak indications from Capex and semiconductors points at IT.

• Consumer Staples is a good overweight candidate as we see upside potential relative to yields while the US consumer seems to hold up.

Sector Recommendation Relative weight

Industrials Underweight -2%

Consumer Discretionary Neutral -

Consumer Staples Overweight +2%

Health Care Overweight +2%

Financials Neutral -

IT Underweight -2%

Communication Services Neutral -

Utilities Neutral -

Energy Neutral -

Materials Neutral -

Real Estate Neutral -

DISCLAIMER

Nordea Investment Center gives advice to private customers and small and medium-sized companies in Nordea regarding investment strategy and concrete

generic investment proposals. The advice includes allocation of the customers’ assets as well as concrete investments in national, Nordic and international

equities and bonds and in similar securities. To provide the best possible advice we have gathered all our competences within analysis and strategy in one

unit - Nordea Investment Center (hereafter “IC”).

This publication or report originates from: Nordea Bank Abp, Nordea Bank Abp, filial i Sverige, Nordea Bank Abp, filial i Norge and Nordea Danmark, Filial af

Nordea Bank Abp, Finland (together the “Group Companies”), acting through their unit Nordea IC. Nordea units are supervised by the Finnish Financial

Supervisory Authority (Finanssivalvonta) and each Nordea unit’s national financial supervisory authority.

The publication or report is intended only to provide general and preliminary information to investors and shall not be construed as the sole basis for an

investment decision. This publication or report has been prepared by IC as general information for private use of investors to whom the publication or report

has been distributed, but it is not intended as a personal recommendation of particular financial instruments or strategies and thus it does not provide

individually tailored investment advice, and does not take into account your particular financial situation, existing holdings or liabilities, investment knowledge

and experience, investment objective and horizon or risk profile and preferences. The investor must particularly ensure the suitability of his/her investment as

regards his/her financial and fiscal situation and investment objectives. The investor bears all the risks of losses in connection with an investment.

Before acting on any information in this publication or report, it is recommendable to consult one’s financial advisor. The information contained in this report

does not constitute advice on the tax consequences of making any particular investment decision. Each investor shall make his/her own appraisal of the tax

and other financial advantages and disadvantages of his/her investment.

Ansvarsreservation

Documents

Waiting for a recharge - Nordea Asset Allocation... · Waiting for a recharge • Overweight Europe with investors being too pessimistic, dovish package from ECB should be a catalyst,