In our multi-asset portfolios, we made a number of shifts in recent weeks including doubling our (modest) position in US tech stocks after prices fell, setting up a buying opportunity. We believe these companies have robust earnings, their dynamism is strong, and they stand to benefit from lower (discount) rates, as seen in markets recently.
Admittedly, their valuations are high, but with prices having corrected and earnings improving, we believe the setup is favourable. From our perspective, valuations appear justified given the return on equity and profitability.
Other changes on the equity side
Elsewhere in equities, we opened a long position in eurozone banks versus the broader European market. Banks’ profitability has improved after the end of the ‘near-zero interest-rate policy’ (ZIRP) by major central banks. Accordingly, banks have seen regular upgrades in analyst forecasts for their earnings per share and these upgrades have been greater than those for the broader market.
Banks’ valuations look attractive to us. With the ECB likely to be among the first developed market central banks to start cutting rates, the sector stands to benefit from a steeper yield curve.
We took a long position in the US NASDAQ and added to Japanese equities as the global economy shows few signs of decelerating. In our view, these markets exhibit the most promising combination of profitability and valuation: they have the earnings power to ‘grow into their valuations’.
We expect markets such as the NASDAQ to benefit from eventual US rate cuts.
We are maintaining our modest long position in Chinese equities.
Currencies and bonds
We halved our long JPY/CHF positions, staying long the yen against long Japanese equities, but we removed our tactical exposure that sought to benefit a more hawkish Bank of Japan and a dovish Swiss National Bank. We remain short Japanese government bonds, where rates are still expected to be below 1% in five years’ time.
We set up a ‘steepener’, expecting the German Bund yield curve to become steeper in the five-year to 30-year segment. This yield curve has remained inverted even as the start of the rate cutting cycle in Europe approaches (the ECB is expected to cut interest rates in June).
We halved our long position in 20-year US Treasury Inflation Protected Securities (TIPS) as the outlook for growth and inflation in the US shifts. Our key long-duration positions remain emerging market local currency bonds (unhedged) and European investment-grade bonds.
Finally, we added to our position in gold. A steady appetite from central banks in an increasingly multi-polar world as well as the benefits of hedging for geopolitical and inflation risk are major drivers of this market.
