Broad diversification to cope with economic divergences
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Each month, LBP AM deciphers market news in video. Today, Sebastian Paris Horvitz, Head of Research at LBP AM, shares his outlook ,on asset allocation for the upcoming quarters in our Market Views" segment.
The global macroeconomic cycle began the year on a positive note. For the coming quarters, our scenario considers different developments in the various regions and countries. For the eurozone, after a year of stagnation, we expect the recovery to continue, while the US economy is expected to slow. One of the reasons for this difference lies in monetary policy. The ECB is expected to cut rates as early as June to support the recovery, while the Federal Reserve is likely to wait until September. The rate cuts would be gradual, in the face of a slow deceleration in inflation. So where does this macroeconomic scenario leave the markets
A diversified asset allocation
While taking into account the uncertainties that lie ahead - including a highly charged geopolitical and political horizon - our macroeconomic scenario is, in the end, fairly benign for markets. This leads us to have a very diversified asset allocation, with no marked bets, even if the persistence of high interest rates means that we continue to benefit from the bond carry.
Fixed Income
The prospect of lower key interest rates should indeed continue to support government bonds, hence our overweight. The carry remains high, and should protect us were growth to disappoint and the appetite for risk decline. Also, in the eurozone, peripheral debt still offers an attractive carry.
Credit
Corporate bonds have performed very well since the start of the year, resulting in somewhat demanding valuations, hence our caution. However, we continue to be exposed to the higher-quality Investment Grade segment and are highly selective in the riskier High Yield segment.
Equity
We remain neutral on equities. In our view, the risk premium offered by the market is clearly low, which is why we are cautious. On the other hand, valuations in the eurozone remain attractive, and the economic and monetary cycle is favorable for the asset class, hence our overexposure to the eurozone. We are still exposed to China but with a rather short-term rationale, given that there are still many uncertainties in the medium term. Finally, we are very cautious on Japan. We think the currency could appreciate, or at least show a lot of volatility and weigh on the Japanese stock market. All in all, we think it's reasonable to remain invested, while respecting our SRI commitments, with a broad diversification that should offer performance while providing good protection.