Globally, keep a contrarian tactical approach - Commerzbank
Analysts at Commerzbank suggest that oil, EM growth, EM fx and inflation have turned but they still do not expect strong trends going forward and expects that 2017 should see global growth only moderately picking up.
Key Quotes
“The persisting global low-growth environment does not provide room for lasting sharp moves. Given the recent strong moves and the risk events ahead we hence recommend tactically reducing risk exposure by trimming equity and corporate bond overweight and sovereign and gold underweight positions. Regarding positions in higher-yielding carry assets, selectivity remains crucial. Our carry position remains solely in corporate bonds, in particular high yield. We keep a cautious stance on EM debt, peripheral sovereign bonds in the euro area and REITs. Strategically, for the whole of 2017 we would clearly prefer equities, corporate bonds and gold over cash, sovereign bonds and oil.”
“Ten core convictions for 2017
1. Global growth to pick up moderately. Yet, the global cycle is not shifting to a higher gear – the long global low-growth cycle drags on
2. Central bank policy divergence to continue, but the effect on markets could slow or reverse – latest once the ECB taper discussion takes over
3. EU and euro area disintegration fears to intensify creating volatility in Bund yields, peripheral spreads and ultimately leading to wider spreads.
4. Volatility spikes with only gradually rising underlying equity volatility require contrarian behaviour. Rates and fx volatilities to rise more sustainably
5. Higher safe-haven yields on rising US core inflation, Fed tightening, ECB tapering and more fiscal stimulus resulting in the hunt for yield abating
6. Credit spreads sufficient to yield outperformance over sovereigns despite gradual spread widening on reduced hunt for yield
7. Equities to yield the highest total returns on stable macro backdrop, 3% dividend yield, 4-6% earnings growth and stable multiples
8. REITs to underperform equities, in particular financials, on valuation, yield sensitivity and potential regulatory relief for financials
9. Commodities to be mainly range-bound, rather than directionally lower or higher, in particular when considering roll losses in oil
10. EM assets and fx to underperform into 2017, on political risk, Fed rate hikes, US dollar appreciation and higher bond yields”
“What could go wrong?
(1) Oil prices could slump rather than gradually rise changing the inflation, Fed, yield and EM picture; (2) tighter financial conditions and tariffs and trade wars could trigger an EM crisis; (3) markets could question Draghi’s “Whatever it takes” uncovering the sovereign debt crisis in the euro area; (4) geopolitical concerns could take centre stage again; (5) the Trump fake: Donald Trump has promised a lot – but what if he doesn’t deliver? (6) highflation, e.g. from a stronger-than-expected oil price development could result in a more aggressive-than-expected rate-hike cycle.”
“Portfolio positioning into 2017 – overweight DM equities, corporate bonds and gold; underweight sovereigns, cash and oil
Reduce risk exposure - trim equity and credit overweights to the benefit of sovereigns and gold; (2) keep EM assets underweight both within equities and local sovereign debt; (3) continue to prefer corporate over sovereign bonds with the focus on high yield and USD IG; (4) switch preference among sovereigns to tactically prefer USTs over euro govies incl. Bunds, also prefer JGBs over Gilts; (5) tactically reduce linker overweight following the strong run (TIPPS moderate overweight, euro linkers neutral and Gilts linkers moderate underweight vs nominal); (6) maintain preference for eurozone and Japan over US in DM equities and for EMEA and EM Asia over LatAm in EM equities; (7) prefer equity, in particular financials, over REITs; (8) prefer precious metals over energy among commodities with base metals cut to neutral following the recent strong run.”