INVESTMENT DIRECTIONS

Pressure drop

Christopher Dhanraj |Nov 15, 2019

The term “spring fever” describes the contradictory emotions people have as the new season approaches: listlessness alongside energy, ennui next to excitement. It could also define the current mood in the markets: relief at the easing of trade frictions, expectations of an economic rebound and optimism around earnings, tempered by concerns surrounding the impact of the coronavirus and ongoing geopolitical tensions. Our take on the major investor themes for the weeks ahead:

U.S. equities: The cyclical versus the structural

Although we expect a modest uptick in economic activity, cyclical sectors appear expensive as prices seem to have outrun the data. We would focus on sectors benefiting from secular trends, namely tech and healthcare. The low-yield environment suggests investors will still seek additional multi-asset carry to reach income goals.

Megatrends: A climate turning point

Gauging the impact of climate change risks is now an increasing priority for the private sector, in businesses’ strategic objectives and capital allocation decisions. But the shift to renewable energy production and the emergence of technological innovations, like electric cars, present significant potential as long-term investment opportunities.

International markets: Looking east

Given the unknowable fallout from the coronavirus in China, investors will likely remain cautious. However, we see potential for other cyclically oriented countries such as Japan and emerging market (EM) equities to outperform. A weaker U.S. dollar should help those regions.

Fixed income: The virtues of carry and quality

We favor high yield bonds based on expectations of supportive monetary policy and the prospect of stronger growth, along with agency mortgage-backed securities (MBS) exposures that may provide the potential for additional yield above Treasuries. Short-duration TIPS can help serve as a potential inflation hedge while limiting exposure to interest rate risk.

Factors: Value, the comeback king?

We have upgraded value to a moderate overweight. Value’s relative strength has rallied from the depressed levels seen last year, while valuation measures like forward-looking earnings and cash flow-to-price support our view. But we believe a longer-run catalyst is needed for our model to move to a high-conviction overweight.

Download full report