Every quarter, Binky Chadha, Deutsche Bank’s Chief Global Strategist comes out with his Global Asset Allocation Chart Book. I personally find it very useful and always learn from it.
In this edition, he discusses Seven Questions and Trades For 2015
How far along is the cycle?
• Asynchronous global recoveries like the current one are typical; 2003-07 was the exception
• Next US recession looks at least 3y away
But have valuations of growth assets already run full cycle?
• No: equities and HY are still cheap to the drivers of valuation
• Stay long growth assets (equities; HY); short recession assets (government bonds; gold);
Why are bond yields so low?
• Neither low inflation nor low growth
• It is low market expectations of monetary policy: big disconnect from Fed guidance
• Rate normalization means higher real rates: short 5y TIPS
What happened to the great bond-equity rotation?
• Rates fell
• Rate normalization is the cyclical asset reallocation mechanism historically
• Long regional banks/short REITs
Do higher rates mean lower equities?
• It depends on the cause of higher rates: higher inflation or higher real rates
• Higher inflation means lower equities; but higher real rates mean higher equities
• Buy the bond-equity correlation on a pullback
Why have oil prices collapsed? Why are equities and commodities diverging?
• Global growth? Supply? Yes, but it is primarily the dollar
• Long equities/short commodities; industrial metals/precious metals; Consumer/Energy
Is the EM de-rating done?
• Not yet: four factors drove the multi-year 2002-09 growth outperformance; each factor has gone into reverse and has further to run
• Long/short a basket of EM scored on valuation drivers
Maintaining overweight equities; underweight bonds, HY over HG; underweight cash and commodities; long the dollar. Two key questions for asset allocation in 2015:
• What sort of equity gains to expect after 6 years of strong returns? Five perspectives on mid-cycle returns predict:17%, 15%, 13%, 13% and 12%
• Why have market rate expectations fallen so far below Fed guidance and how will this disconnect be resolved? Markets always underestimate rate cycles; Fed’s risk management calculus to change
Global Equity Strategy going into 2015
• Modest deceleration in ACWI earnings (7% to 6%); upside risks in Financials downside in Energy
• US equities are slightly cheap; Japan very cheap; Europe fair; EM in line with drivers
• Overweight the US and Japan, neutral Europe, underweight EM
• Commodity consumers over producers: Long EM Asia/Latam; biggest earnings upside/downside medium term: Long Financials/Short Energy; cheap upside to rising dollar: European and Japanese Consumer Discretionary sectors; Counting on a low euro not lower yields: Long European Consumer Discretionary/Short Utilities