Multi-asset investments views - October 2019: Market repricing
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Our views
September witnessed interesting price action with a sharp rotation into pro-cyclical assets, indicating a potential repricing of global growth expectations. Global yields have risen, rates curves have bear-steepened, inflation break-evens widened, commodity indices rallied, whilst in equities value and cyclical stocks strongly outperformed growth and defensive stocks.
Most of these market moves were primarily driven by rates. We argued in our August Multi-Asset Investments views that market pricing of Fed fund rates was extremely aggressive which, coupled with extreme long duration positioning caused a strong reversal since the beginning of the month. Developments over the past few weeks catalysed this repricing, particularly following hints from Trump that trade negotiations are continuing with a possibility for trade detente. Positive data surprises - e.g. retail sales, industrial production and a solid rebound in non-manufacturing ISM in the US, more loosening signals in China in the form of RRR cuts and a lower probability of ‘No-deal Brexit’ in October also supported the rotation.
Market pricing is now consistent with our forecast of two more Fed cuts this year, but remain more dovish versus our forecast beyond 2019 as some recession risks continue to be priced into front-end rates. As a knock on, this re-pricing has channelled into positions within the equity market, causing a large rotation between equity factors from momentum and growth towards value and cyclicals. This movement can continue for a while until positioning is cleaner. This is why we maintain our slight cyclical tilt in our Euro equity exposure. We also remain constructive on Eurozone inflation break-evens as market pricing remains too pessimistic. This conviction is reinforced by the recent shock in oil prices following Saturday coordinated drone attacks on two oil facilities in Saudi Arabia. If sustained, this oil price move could support headline inflation.
Lastly, there is a lot of good news in S&P500 prices which are close to all-time highs. However, the underlying macro momentum remains weak. In this context, the 10% consensus 2020 earnings growth expectation looks optimistic. Therefore, we prefer to wait and see how trade negotiations proceed and maintain our slightly cautious stance on US equities for the moment.
Large reversals across and within asset classes in September
Source: Bloomberg, AXA IM Multi Asset Investments
Our key convictions:
• We keep a slight cyclical tilt in our Euro equity exposure as market pessimism on Eurozone growth is still extreme. We remain prudent on US equities as prices are close to all-time highs while the underlying macro momentum is weakening.
• We remain positive on US High Yield and Emerging Market debt as a more dovish Fed is supportive for carry positions
• We remain constructive on Eurozone inflation breakeven as market pricing remains too pessimistic
Our positioning:
• Underweight US equities
• Cyclical tilt in our Euro equity exposure
• Positive EM debt and US High Yield
• Positive Eurozone inflation breakeven
• Long equity call options delta hedged to protect the portfolios where possible
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