Falcon House View Asset Allocation Changes - Falcon Private Wealth Dubai
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
FALCON HOUSE VIEW | APRIL 2019 | INVESTMENT RESEARCH
Falcon House View
Asset Allocation Changes
Change UW SUW N SOW OW
Liquidity
Fixed Income
Equities
Alternatives
Commodities
Currencies
Cryptocurrencies
Current view, Previous view | UW: Underweight, SUW: Slightly underweight, N: Neutral, SOW: Slightly overweight, OW: Overweight.
Views are not absolute, but relative within an asset class.
Highlights
Editorial Board
∙∙ The worst quarter in 10 years (Q4/2018) was followed by the best quarter in
7 years. Equity volatility started to rear its head in March, though not yet
Daniel Egger, MA, CFA, CMT
reaching levels where we would see a buying opportunity. We continued to
Executive Director
sell equities into strength in early March as we deem the chances of adding
Chief Strategist
at lower levels to be high.
∙∙ The global economic slowdown continued, albeit with signs of stabilizing Gérald Meier, CFA, CAIA, FRM
growth rates. We expect further stabilization in the coming months due to Director
the Fed’s change in course during the last FOMC meeting. The Fed’s turn sup- Senior Strategist
ports our view that central banks will continue with their accommodative
monetary policies during 2019 and beyond. Simon Marti, BSc
Strategist
∙∙ The US Treasury yield curve for a significant part is now inverted, if only to a
small extent. Some observers deduce that a US recession is imminent. Our Aroun Dupuis, MSc
view here is less dogmatic, because there have been instances in the past Director
where the curve inverted and it took more than two years before a recession Crypto Investment Specialist
started. Therefore, from a market timing perspective, the yield curve inver-
sion seems not too helpful, but needs to be followed closely.
∙∙ The oil price has reached levels of early 2018 when the global economy fired
on all cylinders. Several supply side factors play a role here, among them the
dire situation in Venezuela (the country with the biggest oil reserves globally)
and OPEC’s decision to keep output at the cut levels agreed upon in the fall
of last year. Short-term, we would be cautious but expect the oil price to
continue trending up in the medium term.
1FALCON HOUSE VIEW | APRIL 2019
Assessment
Asset Allocation Recommended Asset Allocation
The period of rising volatility has now arrived, it appears, 50%
45.0%
after a strong recovery following the 20-month low recorded
39.1%
in late December 2018 surprised many market participants. 40% 37.6% 38.0%
Was the Q4 correction just one of the many V-shaped 30%
market movements that we witnessed over the past years?
As numerous factors are weighing on the short-term 20%
prospects for risk assets such as equities, a continuation 11.7% 11.6% 12.0%
10%
of the past months’ steep uptrend is not our base scenario. 5.0%
We still need to see a confirmation of the hypothesis that 0%
0.0% 0.0%
global economic growth has stabilised after the slowdown Cash Fixed Income Equities Alternative Commodities
Investments
observed since early 2018. Leading economic indicators
Model Portfolio Benchmark
seem to have found a temporary bottom, however the latest
economic data coming out of Europe is worrying. Source: Falcon Private Bank. As per March 31, 2019. | Due to rounding, the numbers presented
may not add up to 100%.
In the US, market participants have taken a complete turn
when it comes to expected monetary tightening by the Fed, Fixed Income
not last due to the latest projections by the FOMC members
The month of March saw US Treasury yields break a narrow
as to where targets rates will be in late 2020. These projec-
two-month trading range as the US 10Y tightened 29bp
tions have fallen by 50 basis points over the past three
closing at 2.41%. On a 'price' basis, the lower rate trend
months. Statements of late by ECB president Draghi that
throughout the month was essentially one-way. However,
risks to the eurozone’s economic outlook remain tilted to the
rate volatility, as depicted by the Merrill Lynch MOVE index,
downside have also muted those voices which had expected
told a different story as the index first collapsed to the
the beginning of the monetary tightening cycle in Europe to
lowest volatility levels seen since the inception of the index
happen in 2019.
(1988) only to explode 16 vol points higher by month-end.
Capital market yields have retreated further in March, with The heightened volatility was a reflection of the lack of
10-year government bond yields in the US and Germany clarity associated with seemingly mixed messaging by the
some 80 and 70 basis points, respectively, below the levels Fed and its rate policy vs the trend in global growth. The
observed some 6 months ago. Viewed in isolation, this is shape of the curve as measured by the 10Y - 2Y differen-
a clear warning signal that bond investors are concerned tial narrowed to 14bp with an intra-month low of 12bp and
regarding the economic outlook. remained within its narrow four-month trading range. Our
conviction remains high that the US curve will materially
With central banks not spoiling the party for equity inves-
steepen through 2019.
tors by over-tightening monetary policy, a lot will hinge
upon the earnings outlook. Global earnings estimates have EU yields, using the German 10Y bund as a proxy, also
fallen by some 10% during the past 6 months. If the global collapsed roughly 23 bp to -0.04% and Swiss sovereign 10Y
economy starts to gain more traction again, we would yields fell -13bp to -.36%. For both EU & Swiss rates, the
expect this trend to reverse. Because rising labour costs, trend lower, initiated in October 2018, remained intact as EU
higher commodity prices and costly regulation (this being economic data confirming a slowing economy, sovereignty
more of a European phenomenon) weigh on profit margins, concerns, and a looming trade war with the US, keeps
the profit upturn could be more subdued than current 'risk-free' assets well bid.
equity market movements are implying, leading to disap-
Both IG and HY credit ended effectively unchanged at
pointment later in the year.
month-end; however, similar to rate vol, the intra-month
For the time being, we stick with our slightly underweight volatility of credits spreads was high. IG credit spreads, as
position in equities. We aim to keep our powder dry to add measured by CDS indices, ended March roughly 3.5bp wider
to exposure when the market is in a less joyful mood at the for both the US and EU. HY spreads widened 4.5bp and
current point. tightened 4.5 bp in the US and EU respectively. Throughout
the month the range of which both IG and HY credit
spreads swung was rather violent at a 13.5 and 40bp trading
range for IG and HY respectively. We maintain our neutral
weighting in the asset class.
2FALCON HOUSE VIEW | APRIL 2019
Equities Commodities
Volatility started to rise during March, but did not reach After a first short drop in the gold price at the beginning of
levels that were observed during the Q4 correction of last last month, some recovery ensued. However, as sentiment
year. Global equities traded within a narrow range of 4%, levels continued to be excessively optimistic, another drop
indicating rising selling pressure towards the highs, while began towards the end of March. We expect the price drop to
there seems to be healthy demand whenever prices come continue in the short term but would start to look into adding
back a bit. The current situation reminds us of earlier periods to gold if more weakness materializes and sentiment falls
where 'buy the dip' was the investment strategy to follow. significantly. Supported by the OPEC+ supply cut the oil price
We however continue to see numerous differences to 2017, (Brent quality) recovered in the first quarter of 2019 and ended
most importantly the geopolitical standoff between the US the month of March at USD 68.39 per barrel. At their meeting
and China, currently taking the form of a trade conflict that in mid-March, the present members of the joint OPEC and
has already had an impact on global trade (now contracting Non-OPEC Ministerial Monitoring Committee (JMMC) agreed
for the first time since early 2016). Therefore, we do not see to extend their production cuts into the next months. Negative
a blue sky scenario for risk assets in the short term. Only a economic data could weigh on the oil price in the short term,
sustainable and credible solution between Washington and therefore we would be cautious in the short term, but continue
Beijing would remove the conflict’s impediment for global to see potential on a medium-term horizon.
growth, something we deem not very probable to happen
anytime soon. Currencies
The trade-weighted US dollar index last month reached the
In early March, we decided to tactically reduce our equity
highest level in 21 months, inspite of Fed Chairman Jerome
exposure into strength by reducing our Japanese equities
Powell stating that interest rates could remain at current
position to a neutral weight. Although we continue to
levels for 'some time' as previous rate hikes start to weigh on
consider Japanese equities to be attractive on a medium-
US growth. We can also see rising chances of capital flows out
term horizon, we deem the recent weakness in the yen
of the US into earlier-cycle economies. Hence, we expect the
(supporting export-driven Japanese companies’ earnings
greenback to depreciate in the medium term. Short-term,
and thus driving up share prices) a good opportunity to
the euro’s weakness supports the dollar. The fact that the
lighten up on the position.
Swiss franc has gained as of late in our view displays investor
caution, supporting our expectation of continued volatility in
The rally in European equities ended abruptly due to the
financial markets.
Eurozone Manufacturing PMI having fallen further in March
to 47.6. However, the market regained its footing thereafter
Cryptocurrencies
and ended the month in the plus.
The first weeks of March were challenging for the crypto-
Recommended Equity Allocation currencies market, however it ended on a positive tone
25% with again a good performance of the altcoins. The Bitcoin
20.3% dominance, i.e. the percentage of Total Market Capitali-
20%
zation BTC holds, slipped back toward 50.2%, establishing
15% 13.4%
a new year low, according to CoinMarketCap. This is a
positive sign to us, as investors are shifting their allocations
10% into altcoins, a display of a growing appetite for higher
6.8%
5.7%
6.9% 6.8% risk assets. We consider the fall of the Bitcoin dominance
5.2% 4.5%
5% 3.2%
2.3%
3.6% 3.6% a positive signal, which could lead the cryptocurrencies
1.2% 0.9%
market out of the 'crypto winter'. We keep our slightly
0%
US Europe UK Switzerland Japan Pacific EM overweight recommendation for the asset class.
Model Portfolio Benchmark
Source: Falcon Private Bank. As per March 31, 2019. | Due to rounding, the numbers
presented may not add up to 100%.
3FALCON HOUSE VIEW | APRIL 2019
Asset Class Outlook
As per 28.02.2019 UW SUW N SOW OW COMMENTS
Liquidity
Fixed Income
Government Interest rates are simply a function of the market’s expectation on future economic
growth and inflation. Recent data indicates that in 2019 we will have a deceleration
Corporates in both GDP and inflation of which is supportive to lower rates. However, given the
Emerging Markets negative supply/demand dynamics regarding US treasuries, we suggest a neutral po-
sitioning for the year. We remain constructive on credit. However, given the flattening
yield curve and its historical significance in regards to recessions, we have reduced our
High Yield corporate positioning for the whole of 2019 from OW to SOW, reduced our high yield
positioning from SOW to SUW and increased emerging markets from SUW to N based
on valuation vs. high yield.
Equities
Developed Markets
We remain underweight US equities on valuation grounds. Should we encounter a signif-
United States
icant correction, we aim to add to exposure again.
Given the unresolved political issues in Europe, we keep our slight underweight allo-
Europe ex UK & CH (EUR)
cation to European equities.
We hold a small overweight in UK equities. We believe that the UK market remains
United Kingdom (GBP)
good value even in the current Brexit negotiation impasse.
We continue to see outperformance potential in Swiss equities given the defensive
Switzerland (CHF)
characteristics of this market.
We decided to close our overweight in Japanese equities on a tactical basis as we
take the view that a temporary risk-off environment would drive global investors into
Japan (JPY)
the JPY, a typical safe haven currency. This yen revaluation could weigh on Japanese
equities overproportionally.
Pacific ex Japan (AUD) -
Emerging Markets
GCC
Asia We keep our neutral weight in Emerging Market (EM) equities. We still like EM thanks
to the relatively cheap valuations, especially on a cyclically-adjusted P/E basis, but
Eastern Europe the trade disputes continue to weigh on sentiment for the time being.
Latin America
Commodities*
OPEC's decision to extend the period of production cuts, together with the dire situ-
Oil ation in Venezuela, drove up crude oil prices. In the short term, we deem the chances
of a consolidation to be high.
On a medium- to long-term view we are bullish on gold based on supply/demand
Gold dynamics. Short-term, we take the view that a consolidation period on the back of
overly optimistic sentiment has started in March.
Alternatives
Currencies*
EUR/USD Medium-term, we continue to expect a weaker dollar, but would not be too surprised if
GBP/USD it gained somewhat in the near future, given our expectation of another rise in financial
market volatility. The pound has profited from a clearly lower probability of a hard Brexit.
USD/JPY For the time being, a neutral stance is warranted as the situation is very fluid and may
USD/CHF bring negative surprises in the short term.
Bitcoin dominance is receding, reflecting investors' preferences for altcoins. This in
Cryptocurrencies* itself is a positive signal as it displays a higher risk appetite by investors that should
lead to further flows into the asset class.
Current view, Previous view | UW: Underweight, SUW: Slightly underweight, N: Neutral, SOW: Slightly overweight, OW: Overweight.
Views are not absolute, but relative within an asset class.
For commodities and for cryptocurrencies the benchmark allocation is 0%. An underweight in this case would mean that we do not hold an allocation
*
and expect lower prices. With respect to currencies, in case of a high conviction view on a particular currency, portfolios will be hedged accordingly.
Source: Falcon Private Bank. 4FALCON HOUSE VIEW | APRIL 2019
Market Snapshot
Bond Categories 1 month YTD Global Equity Sectors 1 month YTD
Government Bonds 1.91% 2.11% Financials -2.3% 8.4%
Corporate Bonds 2.50% 5.14% Information Technology 3.9% 18.9%
Emerging Market Bonds 1.48% 5.38% Consumer Discretionary 1.6% 13.3%
High Yield Bonds 0.76% 6.70% Industrials -0.3% 13.9%
Benchmarks (duration): Government Bonds: Bloomberg Barclays US Treasury Total Return Healthcare 0.9% 8.2%
Unhedged USD (6.2 years); Corporate Bonds: Bloomberg Barclays US Corporate Total
Return Value Unhedged USD (7.5 years); Emerging Market Bonds: Bloomberg Barclays Consumer Staples 4.0% 11.6%
Emerging Markets Corporates TR Index Value Unhedged USD (4.4 years); High Yield Bonds:
Bloomberg Barclays Global High Yield Total Return Index Value Hedged USD (4.2 years). Energy 1.2% 14.3%
Source: Bloomberg. As per March 31, 2019.
Materials 1.1% 11.4%
Real Estate 5.0% 16.2%
Government Bonds Yield (10Y, local) YTD (BPS)
Telecommunication Services 2.1% 11.2%
United States 2.4% -27.9
Utilities 1.9% 9.8%
Japan -0.1% -8.6
Source: Bloomberg. MSCI ACWI Total Return Indices. In USD terms. As per March 31, 2019.
Germany -0.1% -31.0
United Kingdom 1.0% -27.8
Commodities 1 month YTD
Switzerland -0.4% -12.9
Oil (Brent) 3.6% 27.1%
Source: Bloomberg. As per March 31, 2019.
Gold -1.6% 0.8%
Commodity Index -0.4% 5.7%
Equities 1 month YTD
Source: Bloomberg. In USD terms. As per March 31, 2019.
United States 1.8% 13.7%
Europe ex UK & CH 1.3% 12.0%
Currencies 1 month YTD
United Kingdom 3.2% 9.4%
EUR/USD -1.3% -2.2%
Switzerland 2.2% 14.3%
GBP/USD -1.7% 2.2%
Japan 0.0% 7.6%
USD/JPY -0.5% 1.1%
Pacific ex Japan 1.0% 11.7%
USD/CHF -0.3% 1.3%
Emerging Markets 0.8% 9.9%
EM Currencies -0.4% 1.6%
GCC 3.9% 11.1%
Source: Bloomberg. As per March 31, 2019.
EM Asia 1.8% 11.3%
EM Eastern Europe 0.7% 6.1% Cryptocurrencies 1 month YTD
EM Latin America 0.3% 7.5% Bitcoin 7.1% 10.8%
Source: Bloomberg. MSCI Total Return Indices. In local currency terms, except for
Bitcoin Cash 31.5% 11.9%
Emerging Markets (USD). As per March 31, 2019.
Ethereum 4.0% 8.0%
Litecoin 33.1% 106.7%
Source: Bloomberg. As per March 31, 2019.
5FALCON HOUSE VIEW | APRIL 2019
DISCLAIMER The Falcon House View is published by Falcon Private Bank Ltd., Zurich. This document has been prepared solely for information purposes and for the use of the recip-
ient. All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but we make no representations or warranties,
expressed or implied, as to its completeness and accuracy. Opinions do not imply a recommendation by Falcon Private Bank Ltd. Certain information may contain forecasts, prog-
nosis and other future statements; they do not represent any actual result and are mainly based on theoretical assumptions, which are retroactively applied on historical financial
information. Forecasts and estimates are current only as of the date of this publication and may change without notice. The analysis contained herein is based on numerous
assumptions. Different assumptions could result in materially different results. Any transaction should be considered only if you are fully aware of the risks involved and are in a
position to bear any financial losses. Before making any investment decisions, you should consult your own financial, legal, business, tax and other advisors. The development of
the values mentioned in this document originates in the past. Past performance is no reliable indicator or guarantee for future performance. The information used in this docu-
ment does not constitute an offer of or an invitation to any person to buy or sell any product, or make any kind of investment. Source: MSCI. The MSCI information may only be used
for your internal use, may not be reproduced or disseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices.
None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be
relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is
provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved
in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any
warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability, and fitness for a particular purpose) with respect to this information. Without
limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation,
lost profits) or any other damages (www.msci.com). Source: All Citi indices: “© 2016 Citigroup Index LLC. All rights reserved”. Source Hedge Fund Research, Inc. www.hedgefun-
dresearch.com the HFR licensed Indices is being used under license from Hedge Fund Research, Inc., which does not approve of or endorse any of the content of this document.
DISTRIBUTION IN THE DIFC This document is intended for information purposes only and does not constitute an offer, a recommendation or an invitation by, or on behalf of, Falcon
Private Wealth Ltd. or any of its group affiliates to make any investments. This information has been issued by Falcon Private Bank Ltd. and distributed by Falcon Private Wealth
Ltd. It may not be relied upon by or distributed to retail clients. Please note that Falcon Private Wealth Ltd. offers financial products or services only to Professional Clients who
have sufficient financial experience and understanding of financial markets, products or transactions and any associated risks. The products or services will be available only to
Professional Clients in line with the definition of the DFSA Conduct of Business Module. Falcon Private Wealth Ltd. is duly licensed and regulated by the Dubai Financial Services
Authority (DFSA).
DISTRIBUTION IN AND FROM THE UK BY FPW This information has been issued by Falcon Private Bank Ltd. for use by the recipient and is not intended to be a financial promotion.
It is distributed by Falcon Private Wealth Ltd in London. The views and opinions contained herein represent the house view of Falcon Private Bank Ltd. but may not necessarily
represent views and opinions expressed or reflected in all other Falcon communications, strategies or funds. The material is not intended as an offer, recommendation or solici-
tation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for accounting, legal or tax advice, or investment
recommendations. This communication is not a personal recommendation. We advise you seek direct personal investment advice from your personal financial adviser, based on
your personal financial objectives, risk and financial loss tolerance and your financial awareness, before taking any investment decision. The views and opinions expressed and
the asset classes described may not be suitable for all investors. Information provided is believed to be reliable but neither Falcon Private Bank Ltd. nor Falcon Private Wealth
Ltd. warrant its completeness or accuracy. The data has been sourced by Falcon and should be independently verified before further publication or use. No responsibility can be
accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Falcon Private Wealth Ltd. has to its clients under the Financial Services and Markets
Act 2000 (as amended from time to time) or any other regulatory system. Past Performance is not a reliable indicator of future performance. The value of an investment, and any
income from it, can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. Investments may be denominated
in different currencies and exchange rates may impact the value of such investments causing them to rise or fall in a portfolio. The securities markets may be less developed in
emerging markets and there is a greater risk that an investor may experience delays in buying, selling and claiming ownership of its investments. Emerging markets may also
have less developed political, economic and legal systems and carry a higher risk. Any asset allocation indications, sectors, securities, regions or countries shown above are for
illustrative purposes only and are not to be used by an investor as a recommendation to buy or sell. Any forecasts included must be read with care and should not be relied upon for
investment purposes, They are not guaranteed and are provided only as at the date of issue. They are based on assumptions of Falcon Private Bank as part of a “House” view which
may change at any time. Forecasts and assumptions may be affected by external economic, market, political or other factors. Distributed by Falcon Private Wealth Ltd., 9th Floor,
10 Exchange Square, Broadgate, London, EC2A 2BR. Authorised and Regulated by the Financial Conduct Authority. Registered in England. Company Registration No: 01073156.
© 2019 Falcon Private Bank Ltd. All rights reserved.
6You can also read
