{"id":51421,"date":"2016-04-26T00:15:38","date_gmt":"2016-04-25T22:15:38","guid":{"rendered":"http:\/\/beta.next-finance.net\/strategie\/which-assets-will-be-on-a-roll-until-may\/"},"modified":"2019-12-31T00:40:33","modified_gmt":"2019-12-30T23:40:33","slug":"which-assets-will-be-on-a-roll-until-may","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/strategie\/which-assets-will-be-on-a-roll-until-may\/","title":{"rendered":"Which assets will be on a roll until May?"},"content":{"rendered":"

We recommend adopting a tactical positioning until the end of May in favour of the assets most
\nsusceptible of benefiting from the first two factors, namely bonds and credit, until the end of May, which
\nis when the ECB\u2019s CSPP will kick in, and ahead of the British referendum (see Multi-asset allocation for
\nQ2 2016). <\/strong><\/p>\n

The EUR 20bn increase in the ECB\u2019s QE should continue to have positive effects on bonds in the short term.<\/p>\n

Sovereign and quasi-sovereign bonds<\/strong> will, initially, be the only asset class to benefit from the EUR 20bn increase
\nin monthly purchases by the European Central Bank (ECB), as the universe of eligible bonds will only be expanded in
\nJune. The imbalance between supply and demand will therefore intensify, especially since there will be significant
\nredemptions over this period). We are therefore positive on long duration Eurozone bonds for both the core and peripheral segments.<\/strong><\/p>\n

We have also turned positive on bonds indexed to Eurozone inflation: given our scenario for crude prices, with base
\neffects expected to drive up price indices in the Eurozone and with risks tilted on the upside over the medium term,
\nEurozone short breakevens do seem rather low. <\/p>\n

\"which_assets_will_be_on_a_roll_until_may.jpg\"<\/a><\/p>\n

Credit next.<\/strong> On the one hand, the stabilisation of crude prices is positive for US credit, especially for US High Yield.
\nWhile the US default rate for the US HY may be rising more rapidly than expected (from 2.9% to 3.6% in February,
\nexpected to reached 5.4% end-2016 according to Moody\u2019s), this phenomenon remains confined, as yet, to the energy
\nsector. On the other hand, with the ECB\u2019s Corporate Sector Purchase Programme (CSPP) set to get under way at the
\nstart of June, this should pave the way for a further tightening of spreads and stimulate the primary market.
\nHowever, bear in mind that for similar programmes involving purchases of non-sovereign bonds, spreads widened
\nwhen purchases actually got under way. We are therefore positive on euro and dollar IG and HY until the end of May.
\nBy contrast, we are negative on Eurozone financials as we expected them to report disappointing earnings. <\/p>\n

As regards equities, we remain positive on European markets in relation to their US counterparts on
\nseveral counts:<\/strong> the more favourable monetary cycle (QE extension vs. monetary tightening), the more attractive
\nvaluation in P\/E terms, the lag in the earnings cycle this side of the Atlantic, and the more generous dividend yields
\nsynonymous with a higher carry (see table below). <\/p>\n

\"spreads_high_yield_vs_brent.jpg\"<\/a><\/p>\n

\"equity_valuation.jpg\"<\/a><\/p>\n

Further out, the US earnings cycle remains problematic with decreases of 11.5% year-on-year and 7.8% quarter-onquarter
\nrecorded by US corporates in Q4 2015. As yet, however, the earnings downturn remains confined to the
\nenergy sector, which is reeling from the fall in energy prices, and prospects are that this downturn will lose in
\nintensity given our scenario of an upturn in crude prices. At the same time, the lesser productivity observed in the US
\nwill end up affecting margins achieved by US corporates (currently high by past standards) and hence net margins.
\nWith dividend yields on low at 2%, significant debt-financed share buybacks, a sharp rise in valuation multiples in
\nrecent years and what is expected to be weaker earnings growth going forward, the outlook looks limited as regards
\nreturns for US equities. Under these conditions, it does not seem anecdotic that the outperformance by US equities
\nhas been timed outside earnings reporting seasons (which started on 11 April for Q1 earnings). <\/p>\n

We propose, for tactical reasons, moving back into emerging equities to profit from the favourable momentum in the short term.<\/p><\/blockquote>\n

As regards commodities, we remain neutral short term on crude, but are overweight industrial metals on account of the economic recovery in China, this country being the largest consumer in the world.<\/strong><\/p>\n

As for gold<\/strong>, the precious metal is expected to underperform in our baseline scenario (notably if there is an interest rate hike in the US), but will offer protection should there be a spike in risk aversion and\/or a British exit, so our view is that this asset has its place in a diversified portfolio.