Post on 09-May-2020
Domino effectsGlobal Asset Allocation StrategyFebruary 2019
Investments │ Wealth Management
This material was prepared by Investments |
EQUITY STRATEGY: Take profits in EM
FIXED INCOME STRATEGY: Underweight HY bonds
• Equity markets are currently rebounding, after the major
correction we saw in December. Policies, most importantly the
U-turn from Fed, has been very helpful and might break the
negative domino effects from the correction in Q4.
• Markets are already pricing in a lot of bad news after the sell-off,
which is why we continue to see strong performance at the same
time as almost all key data keeps disappointing.
• Global growth still seems decent and earnings are still growing,
but the negative trend in both needs to stop for this to become a
sustainable rally. We keep neutral weight in equities.
KEEP EQUITIES NEUTRAL
February 2019
• We take profit from our EM overweight and Europe underweight,
which has done quite well, bringing our regional allocation to
neutral.
• The valuation and earnings advantage of Emerging Markets has
waned, while we see risks tilted to the upside in Europe.
• We stay conservative within the bond portfolio and keep HY
bonds in underweight and government bonds in overweight.
• We expect modest returns from bonds in 2019, even though
more cautious central banks are currently supportive for bond
markets.
Domino effects
This material was prepared by Investments |
Market performance & recommendations
Equity markets are rebounding after the selloff in December
Current allocation Previous allocation
ASSET ALLOCATION - N + Comments
Equities
Fixed Income
EQUITY REGIONS - N +
North America
Europe
Japan
Asia excl. Japan
Latin America
Eastern Europe
Denmark
Finland
Norway
Sweden
EQUITY SECTORS - N +
Industrials
Cons Discretionary
Cons Staples
Health Care
Financials
IT
Comm. Services
Utilities
Energy
Materials
Real Estate
BOND SEGMENTS - N +
Government
Investment Grade
High Yield
Emerging MarketsSource: Thomson Reuters / Nordea
This material was prepared by Investments |
But the pace is likely to remain decent on aggregate
Growth outlook facing headwinds
Source: Thomson Reuters / Nordea
DM growth slowing down vs. EM
Source: Thomson Reuters / Nordea
• The global economic growth is facing headwinds. However, the pace is likely to remain decent and the markets have already priced in notable weakness.
• Estimates now point to above-potential expansion, but they normally fall further during the year. Overall, risks are tilted to the downside.
• We do not expect a global recession, meaning sub-2.5% growth. However, we are in a downturn, which makes navigating the financial markets harder.
Estimated earnings are downgraded with speed
Earnings on the path to normalization, and with speed
Source: Thomson Reuters / Nordea
Earnings growth normalizing
Source: Thomson Reuters / Nordea
• 2018 earnings will be approx. 15%, but the more important question is if earnings will continue to grow in 2019. We think so, but at a much lower rate.
• Top-line growth will continue to get some support from consumption and investments, although margin pressure might start to take its toll on earnings.
• Worryingly, estimated earnings are falling rapidly. If the speed of downgrades continues, we will soon be in a earnings recession (if analysts are correct).
Wage growth and financing cost should take its toll
Wages, financing cost and slower economic growth could weigh on margins
Source: Thomson Reuters / Nordea
Margins normally correct in recessions, or due to external shocks
Source: Thomson Reuters / Nordea
• Earnings are revised down by the minute. One reason is the potential margin pressure, though we seldom see margins fall rapidly outside recessions.
• Higher wage growth, financing costs, and the strengthening of the USD last year are the most important factors that has potential to pressure margins.
• However, top line growth and pricing power should keep margins high, ergo our main scenario is low single digit earnings growth, but no recession.
The stellar earnings growth is not only due to tax cuts
The last strong US earnings season for now
Source: Thomson Reuters / Nordea
Impressive US earnings
Source: Thomson Reuters / Nordea
• Q4 earnings are on the path to grow over 14% y/y in the US. Fundamentals are solid, however tax cuts are still boosting earnings with ca. 8-10%-pts.
• Negative effects from the tariff dispute or dollar strengthening are unlikely to affect Q4 earnings in a material way, though there will be some drag.
• The sales growth rate is so far 5,6%, meaning the contribution from organic growth is considerable. All in all, so far a mixed earnings season in the US.
…but China is leaning against the wind latelyDriven by Fed, major balance sheets are contracting Y/Y…
• Policy rates: Fed pushed the pause button, fuelling a come-back for risk appetite YTD. ECB hikes are still a long shot, and PBoC is easing.
• Balance sheet: With max quantitative tightening in the US and balance sheet expansion in China, major balance sheet growth is getting less negative.
• Bottom line: Monetary headwinds could be peaking, but we don’t expect it will be the main driver for the next 6m.
Monetary headwinds are moving closer to a peak
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
…but recession risks have already risen substantiallyLast call? Fed pausing to prevent recession risks…
• Where 2018’s market focus was about monetary tightening per se, 2019 might be about its lagged effects and, hence, center around real growth concerns.
• Is the Fed’s U-turn timely enough to prevent a more severe downturn? We know that monetary policy affects the real economy with a significant time lag.
• The rate hikes already seen are pointing towards an inverted curve, normally a necessary but not necessarily sufficient condition for a US recession.
The key question is, whether damage already is done
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
…with tighter credit conditions a potential catalyst worth monitoringFinancial conditions could mean further downside risk for growth...
• For now, upside in risk assets seems capped by slowing economic momentum and therefore the lagged effect of last year’s monetary tightening.
• The downside, on the other hand, seems capped by Fed’s renewed dovishness.
• Domino effect is key: Tighter financial conditions could mean tighter credit conditions, higher funding cost, lower growth, putting more pressure on markets.
Watch out for domino effects
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
Latest observation
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Easing of financial
conditions
Tightening of financialconditions
Net tightening of credit
conditions
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credit
conditions
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ISM Manu. New orders, USA (rhs) US financial conditions (GS Index), Y/Y
This material was prepared by Investments |
Brexit has so far not affected UK equities more than rest of EuropePolitical noise in US hurt consumer confidence
Politics is adding to the noise
Source: Thomson Reuters / Nordea
• Even though government is (temporary) reopened, the political noise in the US is weighing on consumer confidence, which could start weigh on economy.
• The trade spat between US and China is on idle for the moment, but the deadline of March 1st is approaching. We think some kind of deal will be struck.
• In Europe, Brexit is in focus. So far, UK assets have done OK, but if the outcome becomes a hard Brexit that will probably change.
Source: Thomson Reuters / Nordea
This material was prepared by Investments |
Equities are far from expensive
Global equities are already pricing in slower growth
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
Equities are priced below long-term average
• Global equities has derated close to 20% since January 2018, due to extremely strong earnings growth and negative equity price development.
• Weaker cyclical outlook, higher bond yields and outright recession fears are among the reasons for the derating.
• The derating can continue, but then equites would start to price in an economic recession, and we do not think a recession is likely in 2019.
This material was prepared by Investments |
USD get medium term support from US macro supremacy… …but stretched positioning will dampen the appreciation pressure
Economic divergence continues to set the scene for USD
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Despite slower US growth, macro divergence between US and the rest of the world is still overall supportive for the US Dollar…
• …trumping Fed’s newfound patience. On the other hand, still stretched positioning will dampen the appreciation pressure.
• This should lead to weaker EUR, supporting European exporters. EM liquidity, on the other hand, continues to be an issue despite PBoC easing.
This material was prepared by Investments |
As the markets, sentiment has bounced backVolatility lower, but at a (permanently?) higher level
Sentiment neutral with downside risks
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
• Along with markets, sentiment followed the bounce and is now around neutral levels. But as always, the devil is in the details.
• As the technical side was deeply oversold at the end of December, it’s now approaching overbought territory, meaning short term pull-back risk is higher.
• Volatility has also subsided, but at a high level, indicating that the market worries hardly are over. We expect sentiment to be jittery going forward.
Massive growth in IG debt, and worryingly in the lower rating classes
• The size of the US IG market has grown massively since the financial crisis, as the expansion and easy money have incentivized companies to lever up.
• The growth has been heavily skewed to the lower quality in IG, and the share of BBB is now 50% of total IG market, which increases the risk to investors.
• Not all drivers behind this are bad ones, but if the growth environment worsen and we enter a new downgrade cycle it will be more negative than normal.
US corporate debt growing fast
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
Corporate debt almost on pre financial crisis level
This material was prepared by Investments |
Fed ignited a rally in spreads
Spread tightening in risky bonds after Fed ignited a rally
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
Big differences in yield levels
• January has delivered a great rally in risky bonds, as sentiment improved when Fed eased their communication concerning coming rate hikes.
• However, global growth outlook remains murky, and tightening financial conditions weigh on outlook for HY. Hence we keep the defensive tilt in bonds.
• We expect modest returns from bond markets going forward, although more cautious central banks are currently supportive of bond markets.
This material was prepared by Investments |
…but their earnings outlook is deteriorating
Take profits on a winning EM equity bet
Source: Thomson Reuters / Nordea
EM equities have outperformed clearly since October…
Source: Thomson Reuters / Nordea
• We take profits from our EM overweight and Europe underweight, which has done quite well, bringing our regional allocation to neutral.
• Both the valuation and earnings advantages of Emerging Markets have waned while the region has continued to outperform Europe.
• Europe, for its part, is a heavy underweight among investors and much political noise is already priced in. Hence, risks are tilted to the upside.
This material was prepared by Investments |
Neutralize the cyclical tilt
Neutralize the cyclical tilt – increase Health Care
Defensives in the lead during the selloff
Source: Thomson Reuters / Nordea
• Without going outright defensive in the sector strategy, we take a relative bet within the defensive sectors by reducing IT and raising Health Care.
• We reduce the weight in IT-sector to neutral, given the weaker earnings outlook and weaker guidance from leading companies like Apple and Samsung.
• Among the defensive sectors Health Care looks fundamentally most attractive and is typically a good late-cycle performer.
Sector Recommendation Relative weight
Industrials Neutral -
Consumer Discretionary Neutral -
Consumer Staples Underweight -2%
Health Care Overweight +2%
Financials Neutral -
IT Neutral -
Communication Services Neutral -
Utilities Neutral -
Energy Neutral -
Materials Neutral -
Real Estate Neutral -
This material was prepared by Investments |
February 2019
EQUITIESNEUTRAL
• We take profits from our EM overweight and Europe underweight,
which has done quite well, bringing our regional allocation to neutral.
• Both the valuation and earnings advantage of Emerging Markets has
waned while the region has continued to outperform Europe.
• Europe is a heavy underweight among investors and much political
noise is already priced in. Hence, risks are tilted to the upside.
• .
NEUTRAL ACROSS THE BOARD
The long rally has been particularly strong in North America
Source: Thomson Reuters / Nordea
This material was prepared by Investments |
Equity regions │ Returns (in SEK)
Total return 115% 97,8% 17,2%
Ann. Return 8,0% 7,1% 0,9%
SAA EXCESSTAA
This material was prepared by Investments |
Equity regions │ February 2019
USA Neutral
- Earnings outlook is deteriorating rapidly
- Valuation is the least attractive among
equity regions
- Extended dollar positioning is the key
near-term risk
Recommended weight 40%
Neutral weight 40%
Europe Neutral
- Economic growth waning and earnings
likely to follow
- Too much political noise and economic
weakness already priced in, and valuation
is the most attractive among regions
- Monetary conditions remain supportive
Recommended weight 25%
Neutral weight 25%
Sweden Neutral
- Industrial sector facing some headwinds
from the slump outside the US
- Earnings still healthy, no signs (yet) of
trade-related issues
- Economy doing fine but could be
negatively impacted by higher rates
Recommended weight 15%
Neutral weight 15%
Japan Neutral
- Earnings outlook worse than elsewhere
but not deteriorating as rapidly
- Valuation is attractive and monetary policy
supportive
- The link between yen and equity markets
means more muted return prospects
Recommended weight 5%
Neutral weight 5%
Emerging Markets Neutral
- Earnings outlook is weakening together
with the rest of the world
- Slower economic and trade growth are
concerning, but supporting policies from
China will help
- Valuation no longer a clear support
Recommended weight 15%
Neutral weight 15%
Asia excl. Japan – Neutral
Recommended weight 10%
Neutral weight 10%
Eastern Europe – Neutral
Recommended weight 2%
Neutral weight 2%
Latin America – Neutral
Recommended weight 3%
Neutral weight 3%
This material was prepared by Investments |
USA │ Clouds gathering around the outlook
…and valuation is extended in comparison
Source: Thomson Reuters / Nordea
US earnings outlook deteriorating rapidly…
Source: Thomson Reuters / Nordea
• Last year’s support from strong earnings and economic growth is fading rapidly. A particular concern is the deterioration in the heavyweight sector, IT.
• Valuation remains stretched compared to peers, putting added pressure on the US in a wobbly market.
• Trade war will weigh on all equity regions, but the US is likely to lose the least if things deteriorate. Put together, we prefer a neutral weight.
This material was prepared by Investments |
Europe │ Raise to neutral on very sceptical positioning
PMI’s have continued to weaken and signal significantly lower growth
Source: Thomson Reuters / Nordea
Lower political risk, but equities are still pricing in bad news
Source: Thomson Reuters / Nordea
• Despite leading indicators signalling further disorientation of the growth picture, and earnings estimates seem to high, we raise Europe to neutral .
• ECB members have now changed their language accordingly and political risks have eased. Brexit will still take headlines, but not likely affect EU equities.
• With investors being very sceptical on European assets, we start to see performance risk and therefore raise European equities to neutral.
This material was prepared by Investments |
Finland │ Good value and earnings mean great prospects
…and the usual valuation premium is goneFinnish earnings set to outpace peers…
• We upgrade Finnish stocks to overweight on the back of a strong earnings outlook, great dividends and attractive relative valuations.
• Finnish stocks got more than their share in the Q4 sell-off, priming them for a rebound. However, some of this has already taken place.
• Although there is a risk that analysts have not fully appreciated the impact of the global slowdown, this risk is no more pronounced than in Europe.
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
This material was prepared by Investments |
Denmark│ Tactical outlook balanced, but more positive given the sector composition
Despite fluctuations the relationship holds up well
Source: Thomson Reuters / Nordea
A stronger dollar tends to support Danish companies earnings
Source: Thomson Reuters / Nordea
• Danish stocks have underperformed global stocks during the January risk-on move despite earnings revisions being in favor of Danish stocks.
• Valuation remains a headwind but given shifts in FX and earnings momentum is a positive. We await the earnings season to confirm a possible trend shift.
• We stick to a neutral position for Danish stocks, though we are slightly more positive on the sector level given large share of in Health Care in the index.
This material was prepared by Investments |
Norway │ Valuation is back to neutral, and outlook is balanced
Norwegian equites are no longer expensive
Source: Thomson Reuters / Nordea
Violent turn from support to headwind from oil prices
Source: Thomson Reuters / Nordea
• Oil prices has been a tailwind so far this year, but as the outlook is mixed, the support could fade.
• The outlook for the Norwegian economy is solid and will support earnings growth, however we don’t expect positive effects from weaker NOK this year.
• Valuation has turned from very stretched to fair. The outlook for Oslo Børs is balanced, and we remain a neutral weight.
This material was prepared by Investments |
Sweden │Still a challenging environment for industrials
Swedish equities lagging behind global
Source: Thomson Reuters / Nordea
Industrial-heavy Sweden is dependent on the global momentum
Source: Thomson Reuters / Nordea
• As previously flagged for, the EZ manufacturing slump and weaker Chinese data has weighed on Swedish industrials
• The recent bounce in Swedish industrials appears premature given the worsening Chinese industrial cycle, stay Neutral
• The Swedish economy is doing well, but the housing sector remains a risk, and could continue to weigh on the large banking sector
This material was prepared by Investments |
Emerging Markets │ Downgrade to neutral – weaker Chinese cycle will weigh on EM earnings
Brazilian equities are pricing in too much economic improvement
Source: Thomson Reuters / Nordea
Chinese slowdown add pressure on already weakening EM exports
Source: Thomson Reuters / Nordea
• EM earnings are highly correlated with EM exports. Both should come under increased pressure as the Chinese import cycle deteriorates further.
• US-China trade deal remains an upside risk, but any sentiment boost should be short-lived. The global trade slowdown is not caused by the trade conflict.
• Driven by Bolsonaro optimism, Brazilian equities have made a classic overshoot relative to economic fundamentals. Downgrade EM to neutral.
This material was prepared by Investments |
Japan │ Uninspiring story, triggers needed (and few are on the horizon)
Earnings are also sluggish, a weaker yen could help
Source: Thomson Reuters / Nordea
Growth had a terrible Q3 and prospects for 2019 are bland
Source: Thomson Reuters / Nordea
• Growth is trailing off to some extent with pressure form both investments, consumption and exports. Short term, it’s hard to see positive triggers.
• Earnings is facing a similar story, with estimates following global earnings down, but from a lower starting level. Valuation is OK, but hinges on earnings.
• Foreign investors have pulled large amounts YTD and buyer of last resort is BoJ. Positioning is thus another headwind for Japanese equities.
This material was prepared by Investments |
Sectors│ Returns (in SEK)
EXCESS
This material was prepared by Investments |
Industrials│ Stuck between trade and Capex
Capex plans should provide a boost
Source: Thomson Reuters / Nordea
Trade worries weigh on Industrials
Source: Thomson Reuters / Nordea
• Industrials have underperformed since early 2018, with mostly trade worries weighing on the sector.
• As industrials are sensitive to the economic cycle we still remain cautious on the fundamental side. Sceptical positioning poses an upside risk.
• Upside risks to this sector includes capex, potential infrastructure package in US and a trade deal with China. We remain positively biased but still neutral.
This material was prepared by Investments |
Consumer Discretionary │ A tale of two sectors
But valuation is stretched
Source: Thomson Reuters / Nordea
Consumer Discretionary has done ok in 2018
Source: Thomson Reuters / Nordea
• Consumer Discretionary is torn between the waning brick-and-mortar business and the booming online retail business, making the outlook hard to assess.
• The sector usually performs well in an early-cycle environment which was distorted by the US tax-reform in 2018 – but effects are waning.
• As the cycle matures the labour-intensive part of the sector will struggle. While online retailers will continue benefit from higher sales - we remain neutral.
This material was prepared by Investments |
Consumer Staples │ Macro headwinds and fundamental problems
Consumer Staples are very much yield sensitive
Source: Thomson Reuters / Nordea
Valuations remain elevated in the sector
Source: Thomson Reuters / Nordea
• Consumer Staples experienced relatively flat performance in 2018, as earnings got hurt by higher raw material prices and higher freight costs.
• Competition in the sector is increasing as consumer preferences are changing, where especially E-commerce is changing the landscape.
• Earnings are lackluster, valuations are stretched and the sector faces major headwinds from increasing rates. Underweight.
This material was prepared by Investments |
Healthcare │ M&A activity in big pharma is accelerating
High drug prices has lead to pollical pressure
Source: Thomson Reuters / Nordea
Healhcare typically performs well in late cycles
Source: Thomson Reuters / Nordea
• Major M&A activity in the sector, as a series of deals involving big pharma acquiring cheap biotech companies sparked off over the Christmas
• Renewed focus from Trump on curbing prices could weigh, but so far the pressure is on the middlemen instead of big pharma companies.
• Healthcare is typically a good late cycle sector. We have turned more constructive on Healthcare, and recommend overweight.
This material was prepared by Investments |
Financials │ Cheap, for a reason
Italian politics are weighing on EU banks
Source: Thomson Reuters / Nordea
Growth outlook can drag financials further
Source: Thomson Reuters / Nordea
• As financials have underperformed, they are now very cheap versus history, and the banking sector is split between US and EU banks.
• European banks also struggle with several other things among the weak macro momentum and political uncertainty in Europe.
• European risks and regulation are a headwind, while US deregulation provides a tailwind. Put together, we believe neutral is the best position.
This material was prepared by Investments |
IT │ Earnings outlook is weak
Extremely strong global earnings growth
Source: Thomson Reuters / Nordea
US companies expect strong growth in investments
Source: Thomson Reuters / Nordea
• IT has been sold off, led by higher rates and skepticism for future earnings growth, fueled by profit warnings from both Apple and Samsung.
• The cyclical outlook has deteriorated, though both consumption, capex and the structural outlook (digitalization) still support the sector.
• Protectionism and trade war are obvious risks, and the risk/reward is no longer supportive of an overweight. We cut to a neutral weight.
This material was prepared by Investments |
Communications Services│ Estimated earnings are holding up
Biggest names in the new sector
Source: Thomson Reuters / Nordea
Stocks moved from IT & Consumer Discretionary into Telecom
Source: Thomson Reuters / Nordea
• Earnings estimates has fared much better for the communication sector than for the rest of the cyclicals, and that is a support.
• The new sector includes companies that facilitate “communication & offer related” content and information through media.
• It still hard to judge this new sector, due to the lack of historical data, and we continue with an neutral weight.
This material was prepared by Investments |
Utilities │Improved earnings outlook
Better earnings outlook for Utilities
Source: Thomson Reuters / Nordea
Less pressure from higher yields
Source: Thomson Reuters / Nordea
• There is signs of overcapacity in the USA, which is not good for pricing power in the sector. We are also running at low levels of capacity utilization.
• Earnings revisions has however turned positive, and the growth outlook for 2019 is improving.
• Utilities are highly levered and pay high dividends. If rates go higher it could hurt Utilities through higher costs, but this pressure has recently dropped.
This material was prepared by Investments |
Energy │ Bear market for oil
Booming US shale production
Source: Thomson Reuters / Nordea
The falling oil price is taking its toll on earnings
Source: Thomson Reuters / Nordea
• Positive output surprise from both US and OPEC, US waivers for the main Iranian oil importers and technical headwind led to a bear market in oil.
• Structurally, the outlook is mixed due to the battle between the rise in shale production vs. underinvestment in traditional oil (depletion of traditional wells).
• Earnings estimates has been slashed, despite the recent uptick in oil prices, the risk is high and we stick to a neutral weight on the sector.
This material was prepared by Investments |
Materials │ Higher risk from Chinese steel production weigh
Earnings tend to outperform towards the end of the cycle
Source: Thomson Reuters / Nordea
Metals prices have weighed on the sector’s performance
Source: Thomson Reuters / Nordea
• Materials tend to perform well towards the end of the cycle, but risks have risen from Chinese steel production, and we keep our neutral weight.
• Despite recent rebound, China-worries continues to haunt the sector. Going forward, Chinese easing could provide a boost, but we wait for the evidence.
• Valuation is relatively attractive, but estimated earnings are being slashed, so we do not think valuation will be in the driving seat for now.
This material was prepared by Investments |
Tight labour markets supports earnings in the sectorTight relationship with rates
• The real estate sector experienced strong performance towards the end of 2018, in the backdrop of the correction and risk off moves.
• Whereas strong economic momentum in the US and tight labour markets support the sector, the strong relationship with rates are expected to hold.
• We don’t see significant evidence for significant lower rates from here, but fundamentals are strong, and the combination warrants a neutral position.
Real Estate │Strong fundamentals but limited upside from yield
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
This material was prepared by Investments |
• We recommend to underweight high-yield bonds and overweight
government bonds in the bond portfolio.
• Government bonds offer low yield, but they provide stability for the
portfolio.
• Moderating global growth has made central banks to take a more
cautious approach to monetary tightening. This supports bonds.
Central banks take a step back
February 2019
FIXED INCOMEUNDERWEIGHT
Growth concerns have pushed yields lower
Source: Thomson Reuters / Nordea
This material was prepared by Investments |
Fixed income markets │ February 2019
Corporate bonds Neutral
- Decent economic growth, good level of
earnings and solid balance sheets still
support corporate bonds.
- Increasing government bond yields were a
headwind for corporate bonds last year.
We expect government yields to increase
in a gradual manner and there’s less
headwind in 2019.
- Returns from corporate bonds will remain
low, but they offer stability to the portfolio
High-yield bonds Underweight
- Spread for high-yield bonds widened
forcefully at the end of 2018. Moderating
growth and tighter financial conditions in
the global economy could cause
continued challenges for high-yield.
- High-yield bonds are still supported by
solid corporate earnings and low expected
defaults.
- Cautious comments from Federal Reserve
helped spreads to compress in January.
Government bonds Overweight
- Return prospect is modest due to low yield
- Government bonds provide diversification
and stability to the overall portfolio
- Euro zone inflation outlook is still modest
and central bank does not want to
jeopardize economic growth, which has
moderated. Investor expectations
regarding ECB rate hikes are pushed
further into the future.
Emerging market bonds Neutral
- A dovish turn from the Fed and better FX
performance has been supportive for EM
bonds this year
- Global growth indicators have been falling,
but technical factors provide support to
EM bonds.
- We estimate risks regarding EM bonds as
balanced. High yield appears attractive,
but tighter USD financial conditions could
cause volatility.
Cash Overweight
- Negative euribor rates mean that return is
still basically zero for cash
- Cash provides liquidity to the overall
portfolio and it also has an opportunistic
role if attractive investment opportunities
open up in the markets
This material was prepared by Investments |
EUR IG │ Continued low yields
Resolution on Italian budget provides support for financial corporates
Source: Thomson Reuters / Nordea
Yield has increased from the lows due to spread widening
Source: Thomson Reuters / Nordea
• Decent economic growth, good earnings and solid balance sheets all support European investment grade corporate bonds.
• Corporate bond credit spreads widened considerably last year as euro zone economic growth moderated and ECB bond buying was terminated.
• Returns from investment grade credits will remain low, but within the low risk investment universe, European corporate bonds offer stability.
This material was prepared by Investments |
US IG │More cautious Fed gives some relief
Investment grade yield increased considerably in 2018
Source: Thomson Reuters / Nordea
Currency-hedge eats most of the yield in US IG
Source: Thomson Reuters / Nordea
• Corporate credit fundamentals are still acceptable in the US along solid corporate earnings and robust economic growth
• Increase in government bond yields has been a great headwind for IG. Fed indicating pause in monetary tightening supports IG performance prospects.
• We favour European investment grade credits compared to US ones due to the hedging cost and a shorter duration in European bonds
This material was prepared by Investments |
High-Yield │ 2019 started with a rally, but more challenging times ahead
Forecasts point towards a very low default rate
Source: Thomson Reuters / Nordea
Yields and spreads increased sharply at the end of last year
Source: Thomson Reuters / Nordea
• We recommend to keep high-yield bonds underweight in the bond portfolio. Moderating global growth and tighter financial conditions weigh on outlook.
• High-yield spreads tightened forcefully in January after cautious comments from the Fed and helped capital market to reopen for bond issuance.
• High-yield bond issuer credit metrics are still supported by solid corporate earnings. Also default estimates point towards below historic default ratios.
This material was prepared by Investments |
Positive effect from FX fading, and growth indicators not supportive Valuation remain attractive, even after spread tightening
• A dovish turn from the Fed and better FX performance has been supportive for EM bonds this year, after showing resilience through end of last
year.
• But, global growth indicators have been falling, and as US rate markets have already priced out rate hikes in 2019, the positive effect on FX will
likely fade.
• The environment is not very bullish for EM bonds, although we see some positive conditions like valuation and technical factors, hence we
keep neutral.
EM bonds │Attractive yield, but the environment is challenging for EM assets
Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea
This material was prepared by Investments |
Nordea Global Asset Allocation Strategy Contributors
Strategists
Andreas Østerheden
Senior Strategist
Andreas.osterheden@nordea.com
Denmark
Sebastian Källman
Strategist
sebastian.kallman@nordea.com
Sweden
Ville Korhonen
Fixed Income Strategist
ville.p.korhonen@nordea.com
Finland
Espen R. Werenskjold
Senior Strategist
espen.werenskjold@nordea.com
Norway
Assistants
Victor Karlshoj Julegaard
Assistant/Student
Victor.julegaard@nordea.com
Denmark
Mick Biehl
Assistant/Student
Mick.Biehl@nordea.com
Denmark
Amelia Marie Asp
Assistant/Student
Amelia.Marie.Asp@nordea.com
Denmark
Frederik Saul
Assistant/Student
Frederik.Saul@nordea.com
Denmark
Global Investment Strategy
Committee (GISC)
Leif-Rune Husebye Rein
Chief Investment Strategist
leif-rune.rein@nordea.com
Norway
Michael Livijn
Chief Investment Strategist
michael.livijn@nordea.com Sweden
Antti Saari
Chief Investment Strategist
antti.saari@nordea.com
Finland
Witold Bahrke
Chief Investment Strategist
witold.bahrke@nordea.com
Denmark
Sigrid Wilter Slørstad
Senior Strategist
sigrid.wilter.slorstad@nordea.com
Norway
This material was prepared by Investments |
DISCLAIMER
Nordea Investment Center gives advice to private customers and small and medium-sized companies in Nordea regarding investment strategy and concrete
generic investment proposals. The advice includes allocation of the customers’ assets as well as concrete investments in national, Nordic and international
equities and bonds and in similar securities. To provide the best possible advice we have gathered all our competences within analysis and strategy in one
unit - Nordea Investment Center (hereafter “IC”).
This publication or report originates from: Nordea Bank Abp, Nordea Bank Abp, filial i Sverige, Nordea Bank Abp, filial i Norge and Nordea Danmark, Filial af
Nordea Bank Abp, Finland (together the “Group Companies”), acting through their unit Nordea IC. Nordea units are supervised by the Finnish Financial
Supervisory Authority (Finanssivalvonta) and each Nordea unit’s national financial supervisory authority.
The publication or report is intended only to provide general and preliminary information to investors and shall not be construed as the sole basis for an
investment decision. This publication or report has been prepared by IC as general information for private use of investors to whom the publication or report
has been distributed, but it is not intended as a personal recommendation of particular financial instruments or strategies and thus it does not provide
individually tailored investment advice, and does not take into account your particular financial situation, existing holdings or liabilities, investment knowledge
and experience, investment objective and horizon or risk profile and preferences. The investor must particularly ensure the suitability of his/her investment as
regards his/her financial and fiscal situation and investment objectives. The investor bears all the risks of losses in connection with an investment.
Before acting on any information in this publication or report, it is recommendable to consult one’s financial advisor. The information contained in this report
does not constitute advice on the tax consequences of making any particular investment decision. Each investor shall make his/her own appraisal of the tax
and other financial advantages and disadvantages of his/her investment.
This material was prepared by Investments |
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