Strategy

Preparing for higher yields: Downgrading equities and credit

According to Goldman Sachs, the likelihood of a rise in government bond yields has increased and Goldman Sachs see this as a key aspect of the near-term macro outlook...

Macro outlook: Sustained growth and higher bond yields

Growth has improved substantially. Most of the acceleration we had
expected is now behind us, but we expect growth to be sustained at
current or slightly higher levels, with the US growing at around 3% through
2017. We think the likelihood of a rise in government bond yields has
increased and see this as a key aspect of the near-term macro outlook.

Our recommend allocation and investment themes

Equities: We downgrade to neutral over 3 months as a sell-off in bonds
could lead to a temporary sell-off in equities. This makes the near-term risk/
reward less attractive despite our strong conviction that equities are the
best positioned asset class over 12 months, where we remain overweight.

Commodities: We expect dispersion within commodities due to different
supply situations together with backwardation to drive returns and see
opportunities in nickel, zinc palladium and aluminum. However our return
forecast for the asset class as a whole is low and we remain neutral.

Corporate credit: We downgrade to underweight over both 3 and 12
months. We think spreads will narrow slightly, but given already tight
levels, rising government bond yields are likely to dominate the returns,
especially for US IG credit where spreads are the lowest.

Government bonds: We stay underweight. We expect yields to rise due
to sustained high US growth and accelerating inflation, a decline of
deflation concerns in Europe and an improving inflation outlook in Japan.

Investment themes: We seek to benefit from sustained growth at current
higher levels and the return of cash to shareholders.

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Anthony

Anthony

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