Stocks: Use Setbacks as Buying Opportunity
Despite the recent rally, the outlook for Eurozone equities remains positive, says Nannette Hechler-Fayd'herbe, Head of Investment Strategy. Her advice for investors: "Use temporary setbacks as buying opportunities."
Dan Scott: When looking at the current investment strategy, we see that your views on the three main asset classes remain unchanged. Does the recently adapted Fed policy have no impact on the general assessment of the global macro environment?
Nannette Hechler-Fayd'herbe: Despite the possibility that the US Fed may not hike interest rates this June, it is still clearly on an interest rate normalization path, provided labor market data continue to improve and inflation normalizes as we expect. So there is no significant impact on our global macro scenario.
Markets reacted significantly on the day of the FOMC. US interest rate expectations already priced in a slower tightening trajectory than the Fed had previously indicated. With a broadly unchanged macro scenario, we see the further fall of bond yields as making fixed income increasingly unattractive, while equities are relatively more attractive. The dollar outlook also remains positive, as even a slow pace of Fed normalization contrasts with ongoing easing elsewhere.
Several European equity markets reached all-time highs in the past weeks. Is it time to reap profits?
The strong performance of Eurozone equities this year has been fueled primarily by the effects of the ECB's quantitative easing (QE). While the experience with QE in other countries has been mixed for bond yields, it has been uniformly positive for equities.
The declining euro will provide a welcome boost to euro area companies' profits. European earnings have lagged behind the US in particular in recent years and now have significant recovery potential. We thus remain positive and consider temporary setbacks as buying opportunities after a strong and rapid rally. So it's not time to reap profits in our view. We also remain positive on other markets that benefit from monetary easing policies, such as Australia, China and of course Japan.
The very low yield level makes it difficult to achieve positive returns with fixed income. Should investors get their hands off this asset class?
Government bonds remain unattractive for investors who believe central banks will eventually succeed in their reflation campaign. Yields are well below their fair value and total return prospects are not enticing, particularly as the Fed will still likely raise rates this year. We therefore continue to see significant risk of negative total returns in core bond markets and expect fixed income in general to underperform equities.
We do see some potential for positive returns in high-yield and select emerging market bonds. Our most preferred EM credits include Indonesia, South Africa, Mexico and Peru. Local currency EM bonds benefit from easier monetary policies, but weaker currencies create headwinds particularly from a USD and GBP investor's perspective.
Speaking of commodities: oil inventories are reaching record highs and piling up further. What implications does this have for investors?
The rise of oil inventories is especially marked in the USA. Many producers are pumping even more oil from individual sources as prices fall. So even as the number of rigs in operation and the pace of investment in new operations is falling, oil supply is still rising.
For investors, the low level of oil prices is still not appealing, as the rise in storage costs means that the investible parts of the oil market are not as cheap as the spot crude prices indicate.
The price of oil is of course also an important macro-economic variable, which will tend on balance to boost consumer spending and benefit oil importers in particular, particularly Europe and Japan where we have strong regional preferences.