House View March 2017 - SEB Group · by the House View committee; ... - We stress however that...

SEB House View March 2017

Summary

- Macroeconomic momentum and EPS revisions is, and will continue to be, supportive for equities

- Soft data strength will over the coming months translate into hard

data strength; as is already happening

- EPS will be revised higher going into the Q1 earnings season

- We acknowledge that technical indicators are hovering around overbought levels

- The predictive power hereof is however low and as such we do not

fear indicators such as these

- We expect that any purely sentiment driven correction will be short lived and shallow given the very strong macroeconomic backdrop

- We do not expect equities to react negatively to a March rate hike

- We do not expect the FED to be a negative factor for the markets

unless they revise their expected rate hike path in a more hawkish

direction

- Which will require an overshoot of inflation expectations for

the US

- If a correction materializes over the coming month we expect to increase risk utilization even further

- Aligning our positioning with our positive macroeconomic outlook

for 2017

- We are discounting political risk in Europe with five risk utilization points

- Implying that we would have been 5%-points higher in risk if the

political outlook for France and Italy was less uncertain

Old (55%)

The speedometer controls to what extent the portfolios should

utilize their risk budgets. It is connected to the model portfolio

(page 3) which at all times utilizes its risk budget in-line with the

speedometer. In a very general sense it can be interpreted as

equities on/off (with 50% being neutral).

New (60%)

10% 10% 30% 50% 70%

Cash

Commodities

Emerging Market Debt

High Yield Bonds

Investment Grade

Equities

Government Bonds

Allocation

Strategic

allocation

Diff

Multi Asset Model Portfolio

Model Portfolio- The allocation towards equities is increased and the allocation towards government bonds is correspondingly decreased

- The model portfolio is 8%-points overweight equities compared

to the strategic allocation

- We prefer equities over credits as we are tilting the portfolio towards a barbell like strategy

- We view the pricing of credits to be more aggressive than that of

equities

- We do not expect further spread tightening in credits and

expect absolute yields to move higher once the rate hike

cycle starts to become reflected in the mid to long end of the

curve

- We remain underweight Emerging Market Debt

- This underweight has been in place for the past 6 months due to a

fear that a repricing of the FED rate hike cycle would lead to USD

strength and EM FX weakness

- A fear which has not materialized

- We remain underweight over the March rate hike

- But are cautious about maintaining the underweight

going forward given the improvements which we have

seen in EM macro and the increased resilience to a

tighter US monetary policy

- The portfolio remains underweight commodities

- Energy fundamentals are looking increasingly negative but has yet

to be reflected in prices

- Outsized rise in inventories and production

Long only portfolio. Yearly VaR(95%) ex. mean between 7% and 21%.

No restrictions on the individual asset classes. The weights are set manually

by the House View committee; i.e. they are not based upon an optimization

model. Source: SEB

Multi Asset Class Risk and Return Estimates, 12M

Source: SEB

Global Equities

EM Equities

Government

Bonds

High Yield

Investment Grade

EMD LC

Swedish Equities

-3%

-1%

1%

3%

5%

7%

9%

0% 5% 10% 15% 20%

Ret

urn

Risk

20% 0% 20% 40% 60%

North America

Europe

Japan

Sweden

East Asia ex. Japan

EM Asia

EM Ex. Asia

Allocation

MSCI AC

Diff

Equity Model Portfolio (Pure)

Relative positioning- We maintain an overweight to European and Japanese equities

- Financed by an underweight to the US and EM

- On a relative basis European equities looks compelling compared to their US counterparts

- A weak EUR will be a boon for European exporters

- We expect the EUR to weaken further against the USD over

the coming quarters

- Given the substantial slack that remains in European labour

markets and our expectation of a continued low EUR policy rate

European equities face less margin pressure than US equities

- We even expect European margins to increase (converge

upwards towards US margins) over the coming quarters

- We expect 2017 EPS revisions to be a more positive factor for

Europe than for the US

- A continuation of the trend that started in late November

- The main risk to our European overweight is the geopolitical

situation

- The French elections in May has already started to be priced

into the fixed income markets but we believe that it is too

early to discount it for broad European equities

- Within the EM space we are underweight LatAm

Source: SEB

Equity Risk and Return Estimates, 12M (Forward P/E)

Source: SEB and Bloomberg

China (13.3)Europe (14.2)

Sweden (16.0)

DM (17.4)Japan (16.5)

EM (13.4)

US (18.4)

LatAm (16.1)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

10% 12% 14% 16% 18% 20% 22% 24% 26%

Ret

urn

Risk

Fixed Income Model Portfolio (Pure)

- Relative Duration

- We are slightly short duration against benchmarks in relative

mandates

- We are short Sweden and Germany but neutral/long US rates

- Fed hiked, as expected, in December and indicated three hikes

during 2017 compared to previously two hikes

- ECB will continue to buy bonds during 2017 but at a slower pace

than during this year

- Trumps fiscal policy, higher inflation and central banks adding less

stimulus all supports rates to continue to climb higher

- Curve View

- We are positioned for steeper yield curves in Sweden and Europe

given that rate hikes from both the ECB and the Riksbank are far

off

- Higher global rates will thus likely steepen the curve

- We are neutral the US curve. For long rates to climb markedly

higher we think that a more aggressive Fed hiking cycle needs to

be priced which regardless should hurt the short end more

- Country spreads

- We are long US rates both vs Bunds and Swedish

- We regard US rates to be much more fairly valued. If the risk

sentiment turns US rates should fall much more than Bunds

The market is not in alignment with the FEDs projection

2017-01-10

FED Median

Jul16 Oct16 Jan17 Apr17 Jul17 Oct17 Jan18 Apr18 Jul18 Oct18 Jan190.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

2.2

Impl

ied

FED

fun

ds r

ate

Decision variables March 2017

Factors

- Macro and positioning are the factors impacting the risk utilization of the House View the most at present

- Macro being a clear positive

- We expect this strength to continue into March and April

- Positioning is becoming a growing problem as investors continues

to increase their allocation towards equities

- However we are still not at levels stretched enough to force

us into a contrarian neutral/underweight stance towards risk

- Despite the repricing of the FED rate hike cycle we are still not fearing central banks

- As such central banks are not viewed as a negative for risk on a 1-3

month horizon

- We stress however that Central Banks can become a

negative if inflation expectations starts to get entrenched

- Political risk is not one of the main drivers of the risk utilization of the House View at the moment

- The reduced impact of politics is to a large extent a consequence

of the strong macro and the reaction of markets to both the US

presidential election and Brexit

- We expect that political turmoil in both Europe and the US

will be manageable from a short term financial aspect

Macro

Earnings

Sentiment

Central Banks

Valuations

Positioning

Politics

-10

-8

-6

-4

-2

0

2

4

6

8

10

0 2 4 6 8 10

Po

stiiv

e/N

egat

ive

Importance

Macro and markets March 2017

2017-03-06

FED Median

Jul16 Oct16 Jan17 Apr17 Jul17 Oct17 Jan18 Apr18 Jul18 Oct18 Jan190.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

2.2

Impl

ied

FED

fun

ds r

ate

Developments in the Markets

- Following a range of relatively hawkish speeches by a range of relatively dovish speakers the pricing of the FED rate hike cycle has changed significantly since the last House View meeting

- Lifting the likelihood for a March hike to more than 90%

- The repricing has supported the USD and lifted longer dated US rates

- Note that the USD strengthened more against DM peers than EM

peers

- The latter continuing to show a high degree of resilience

towards tightening US monetary policy

- In line with improvements in macro we saw further upward revisions of European and Japanese EPS estimates

- US EPS estimates were however revised down slightly over

February implying that for MSCI world the development was flat

- It is however important to note that this follows a very strong

wave of upward revisions over the past 3-4 months

- Commodity prices stalled over February

- Oil prices being hampered by increasing US production,

inventories, and rig-count

- Equities continued to rally over February despite the repricing of the US rate hike cycle

- Pushing technical indicators into overbought territory

- Pushing valuations to levels only surpassed during the IT-bubble

But the market is still doubting the FEDs projection of the rate hike cycle over the coming 1-2 years

The likelihood for a rate hike on 15 March increased significantly over February

Source: Macrobond

Source: Macrobond

Economy – Developed Markets

- Macroeconomic momentum for Developed Markets gathered further pace in February

- Lifting momentum to levels last seen during the initial recovery

from the financial crisis in 2009/2010

- Sentiment indicators continued to improve over February despite the already high levels

- ISM Manufacturing New Orders, which can be seen as a leading

indicator for leading indicators, rose to 65.1 in February

- Signaling an improvement in growth very rarely surpassed

historically

- In line with the strong gains in sentiment indicators we are also seeing more and more evidence that hard data is improving

- Retail sales in the US is growing in excess of 5% on a year on year

basis

- Initial Jobless Claims fell back to levels last seen in 1974

- Despite the strong gains in US employment over the past couple of years wages continues to grow at a modest, albeit increasing, pace

- Atlanta FED Wage growth measure, which has been higher than

the aggregated number of the job report, fell back in February

- Both headline and core inflation gathered pace for both Europe and the US in February

- Core PCE inflation is now close to the 2% target of the FED

Yet inflation expectations are still lower than during QE3

ISM is signaling that US growth should accelerate to 4% over the coming quarters

Source: Macrobond

Source: Macrobond

Economy – Asia and Emerging Markets

- Albeit growth is improving for the EM space it fails to match the speed and the strength of the DM improvement

- The divergence between EM and DM growth in terms of PMIs is as

such now the largest since early 2014

- For EM Asia the pickup in trade continued to gather pace

- South Korean exports are now running at the fastest pace since

early 2012

- The improvement in trade and growth for Korea has lifted

the Won and has been one of the prime drivers behind the

strength of EM FX

- Growth continues to look strong for China

- Driven in part by rising construction spending and monetary

stimulus

- Note however that the growth rate of the money supply in

China has moderated as of late

- In the banking survey for China we are seeing continuing falling

loan demand

- Inflation rates for the EM space have failed to pickup inline with rising DM inflation and weak EM FX

- This weakness has contrary to the expectations of the House View

led to a series of EM rate cuts

- Most notable for Brazil which is trying to stimulate growth

Current account deficits for EM has improved significantly since 2013 thereby improving resilience to US rate hikes

Source: Macrobond

Source: Macrobond

Global trade looks set to improve over the coming quarters thereby supporting EM growth

In Focus March 2017

Questionnaire #1

How much is macro impacting your view on our current

level of risk utilization?

How much is central banks impacting your view on our

current level of risk utilization?

How much is positioning impacting your view on our


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How much is political risks impacting your view on our


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Questionnaire #2

How much is earnings impacting your view on our


How stretched do you view positioning at the moment?

How sensitive do you think markets are in terms of

disappoints on fiscal stimulus in the US?

Would you like to be overweight, neutral, or

underweight risk right now?

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Overweight

Neutral

Underweight

Questionnaire #3

What is your preferred allocation to Equities?

What is your preferred allocation to Emerging Market

Debt?

What is your preferred allocation to High Yield bonds?

What is your preferred allocation to Government

bonds?

Overweight

Neutral

Underweight

Overweight

Neutral

Underweight

Overweight

Neutral

Underweight OverweightNeutral

Underweight

Questionnaire #4

Should we discount the French election in our

aggregated level of risk utilization?

Do you think equity valuations are stretched to a degree

where it introduces a premium in our risk utilization now?

Yes

No

Yes

No

Asset Class Views March 2017

Developed Market Equities – 12M Outlook

- Developed Market equities will be the best performing major asset class over the coming 12 months

- The primary driver behind the positive returns will be topline

growth

- The valuation of MSCI World is at a level where we do not expect to see further multiple expansion

- Note that we expect multiple expansion in Europe and Japan but a

slight contraction in the US

- Leaving the total for MSCI World unchanged

- The return of equities will largely mirror the gains in earnings

- The primary driver of EPS will be topline growth

- Supported by the stabilization and improvement in the

outlook for 2017

- The energy sector will go from being a drag on aggregate

earnings to a positive contributor

- It is expected to be the largest contributor for 2017 EPS

growth

- Rising and steepening yield curves will support EPS growth for

financials

- Topline growth will dominate the overall margin pressure which we are foreseeing for 2017

- Rising financing costs and wages will in our view drive margins for

US companies down from the present all time high levels

- However at the same time we expect to see margin

expansion in Europe

We expect to see convergence between European and US profit margins


The strong upward revisions that we have seen in EPS are in line with the improvements of PMIs


Emerging Market Equities – 12M Outlook

- Emerging Market equities is expected to deliver a return in the vicinity of Developed Market equities

- Albeit with higher volatility and with a more negatively skewed

return profile

- A range of traditional arguments for high returns of the asset class are in place:

- EM is trading at a historically large discount to DM on most

valuation metrics

- Weakening EM FX (we foresee further weakness in 2017) will be a

boon for EM exporters and support local currency EPS growth

- A strong(er) US economy should support a revival in global trade

- A revival which have been elusive for the past 8 years

- The stabilization in commodity markets implies that the large EM

energy sector will no longer be a drag on the aggregated EM

universe

- Despite the range of positive factors several things are in our view skewing the return profile to the downside

- Geopolitical risk is high and we have yet to see political reforms in

some of the major EM countries

- Brazil, Turkey, and Russia

- The argument that a strong US economy will lift global trade is in

our view weaker than normal given that we expect the Trump

presidency’s stimulus programs to be highly US focused

- The Chinese stimulus of 2016 will diminish during 2017 in an

attempt to prevent the formation of bubbles

Macroeconomic momentum is faltering once more for LatAm

Source: Bloomberg and SEB

High Yield Bonds – 12M Outlook

- We expect that global High Yield bonds will outperform Investment Grade and Government bonds over the coming 12 months

- Structural factors which historically have been supportive for the asset class are still in place

- The growth outlook remains stable and the likelihood for a

recession in 2017 have fallen post the Trump election

- The latter is our primary argument as to why we expect High

Yield bonds to outperform

- Expectations to gradually rising core government bond yields will

continue to drive investors into less rate sensitive asset classes;

such as High Yield

- Credit conditions are being loosened in both Europe and the US

- Note that this is a reversal of the trend which we saw for

2016 as a whole

- Stabilization of oil prices eases the pressure on energy issuers

- We do however not expect further spread compression in

this space for 2017

- The return of topline growth in both Europe and the US will in our

view improve free cash flows

- The primary risk for the High Yield space is rising financing costs

- This as leverage within the High Yield space has risen over the last

couple of years

- However we do not expect this to be a major risk factor for

the coming 6-12 months

We expect US High Yield spreads to go through the lows of 2014

Source: MacroBond

US High Yield is trading tight compared to our fair value model

Source: MacroBond

Re

gim

e 1

Reg

ime

2 Reg

ime

3

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

Be

ta o

f EM

D t

o U

S ra

tes

-1.5 -1 -0.5 0 0.5 1 1.5-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

Change in US 5Y yield

Cha

nge

in E

MD

LC

yie

ld

Regime 1

Regime 2

Regime 3

Emerging Market Debt – 12M Outlook

- We expect Emerging Market debt to deliver a return in excess of DM government bonds and Investment Grade for 2017 as a whole

- However we expect the return to be a story of two halves

- For the coming quarter we expect to see weakness of EM debt coming from both the rate and the FX component

- EM FX will weaken compared to the USD as the market continues

to price in the stronger US growth outlook and the potential for a

more aggressive US rate hike cycle

- EM rates will in this initial stage follow US rates higher

- As the US space becomes increasingly attractive we expect to see

outflows for EM which also will have an upward pressure on EM

rates

- We do not expect to see EM debt outperformance until the repricing of the US rate hike cycle is complete

- In terms of EM inflation we expect it to converge upwards towards the rising DM inflation over 2017

- EM FX weakness will lead to rising import prices

- Stronger commodity prices will no longer be a drag on inflation

- Rising EM inflation reduces the potential for EM monetary stimulus

and we expect to see signs and discussions about tightening once

we get closer to the summer

- This being especially so if growth of the EM space stabilizes

further

- Geopolitical uncertainty and a lack of reforms in the EM space skews the return profile to the downside

We see an increased likelihood of ending up in a regime in which US yields rise rapidly together with EMD (#2)

Source: SEB

Source: SEB

A regime where the beta of EMD to US rates is positive

Core Government Bonds – 12M Outlook

- We expect core government bonds to deliver a negative return over the coming 12 months

- Driven on an aggregated level by rising US rates

- We expect to see both a flattening and a move higher for the

US

- In contrast to the US market we expect short rates in Europe to remain firmly anchored

- Leaving a steeping of EUR curves as the only possible outcome so

forth rates and inflation expectations continues higher

- The divergence between Europe and the US is largely a reflection of the different stages in the business cycles

- While slack in the US economy has all but evaporated European

unemployment rates are still sitting firmly above most NAIRU

estimates

- We are as such a long way from experiencing any meaningful

core upward inflationary pressures in Europe

- However it should be noted that the weak EUR will lift

headline inflation

- But we expect the ECB too look past this and the

potential upward pressure on inflation from rising

commodity prices

- Supply/demand dynamics all else equal also favors Europe over the US

- Fiscal stimulus in the US will increase supply while demand in

Europe will remain high given the ECBs QE program

Breakeven inflation remains substantially higher for the US than for Europe

Source: Macrobond

Risk environment March 2017

Risk Environment

- We see a sharp rise in inflation and nominal yields as the major risk for 2017

- This as higher inflation will lead to more hawkish central banks

(especially the FED) and that higher yields will lead to a repricing

of all risk assets

- In terms of the latter we note that global equities (especially

US equities) are trading at valuations last seen during the IT-

bubble

- In such a scenario we expect the US yield curve to flatten, while at the same time move upwards, and equities to correct

- The latter given the very stretched valuation levels that global

equities are trading on

- With forward multiples trading close to 20 for the US

valuations are one of our main strategic risks

- We also expect to see significant USD strength and broad EM

underperformance

- We doubt that US growth in the range of 2.5% to 3.5% will be enough to withstand a significant hawkish shift by the FED

- In other words: Even if the running US GDP growth of 2.5%

(Atlanta FED) is maintained then a hawkish FED will drive equities

lower

- We see the likelihood of the scenario to be increasing over 2017/2018

- Noting that the current revival in growth is coming very late in the

cycle which all else equal makes cost-push inflation more likely

High valuations are one of our major strategic concerns

Source: Macrobond

Disclaimer

This report has been compiled by SEB Group to provide background information only and is directed towards institutional investors.

The material is not intended for distribution in the United States of America or to persons resident in the United States of America, socalled US persons, and any such distribution may be unlawful.

Although the content is based on sources judged to be reliable, SEB will not be liable for any omissions or inaccuracies, or for any losswhatsoever which arises from reliance on it. If investment research is referred to, you should if possible read the full report and thedisclosures contained within it, or read the disclosures relating to specific companies.

Information relating to taxes may become outdated and may not fit your individual circumstances.

Investment products produce a return linked to risk. Their value may fall as well as rise, and historic returns are no guarantee for futurereturns; in some cases, losses can exceed the initial amount invested. You alone are responsible for your investment decisions and youshould always obtain detailed information before taking them. If necessary, you should seek advice tailored to your individualcircumstances from your SEB advisor.

This material is not directed towards persons whose participation would require additional prospectuses, registrations or othermeasures than what follows under Swedish law. It is the duty of each and every one to observe such restrictions. The material may notbe distributed in or to a country where the above mentioned measures are required or would contradict the regulations in that country.Therefore, the material is not directed towards natural or legal persons domiciled in the United States of America or any other countrywhere publication or provision of the material is unlawful or in conflict with local applicable laws.

House View March 2017 - SEB Group · by the House View committee; ... - We stress however that...

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Transcript of House View March 2017 - SEB Group · by the House View committee; ... - We stress however that...