Global CIO video: "Investors are likely to move into equities."
Recent improvements in the backdrop for financial markets have prompted us to adopt a constructive stance on equities again. We look at the latest developments and our current views.
Following the sudden deterioration in the backdrop for financial markets last month, September has seen a turn for the better. Political tensions in Italy diminished with the formation of a more EU-friendly government, and in the UK, the odds of a no-deal Brexit were significantly reduced. In addition, new hopes for US-China trade relations emerged as the two countries are due to hold talks next month. Add to that more accommodative central banks, and it is evident why investor sentiment has improved and equity markets have gained further ground.
Equities offer attractive premium over bonds
The improved backdrop is one reason why our Investment Committee decided to move back to an equity overweight in our portfolios. An even more important reason is that, despite muted earnings growth and downward earnings revisions, equities offer a hard-to-beat premium over government bonds or cash (the so-called equity-risk premium). And with many investors, doubtful of equities so far this year, still able to deploy cash, we believe the equity rally has further to go. Within equities, we retain our preference for developed markets, particularly the USA. As risk aversion diminishes, yield curves should steepen, which should especially benefit financials, now one of our preferred sectors.
Less favorable outlook for high-yield bonds
Another important change in our investment strategy this month has been to scale our view on high-yield bonds back to neutral following a strong performance this year. Yield spreads are now tight and vulnerable to setbacks.
As always, we will continue to monitor developments very carefully and adjust our views as necessary. For now, we believe the chances for a further move up in equities are considerably better than the risk of a significant downturn.