With economies reopening more and more and loose fiscal and monetary policy continuing to underpin the post-pandemic recovery (notably in the US), we see room for further gains by risky assets and higher bond yields.
According to our latest asset allocation monthly, the cyclical recovery should gain traction later this year and broaden beyond the US to other major economies. Cyclically sensitive assets (e.g., commodities, Japan, and US value) are set to perform well in the second half.
In terms of allocation, our net equity exposure remains long. We are also long risky assets such as commodities and emerging market (EM) local currency debt. Our portfolio diversifiers include a long position in gold.
Equities
We are long EM equities given our view that earnings growth in China/Asia will be supported by dynamic local technology and e-commerce sectors as well as a strong high-end manufacturing sector. South Korea and Taiwan equities should benefit. Japanese stocks are well placed to profit from a broadening global recovery, a cash-rich corporate sector and still low valuations.
We are bullish on the US. Accordingly, we are long US value stocks. In the eurozone, we are long EMU small caps versus large caps. Both positions reflect our view that valuations are attractive.
Government bonds
We have taken a short position in US government bonds and TIPS given the potential for real yields to rise from their historically low levels. This trade should be a good hedge to the long risk exposures in multi-asset portfolios. We are underweight EMU bonds. Here too, we expect yields to rise.
We are long EM local debt since we expect spreads to fall as investors search for yield. As for EM currencies, we see plenty of room for appreciation, especially if the US dollar resumes its downtrend.
Check out our asset allocation monthly for our views on:
- Credit
- Currencies
- Commodities
- Thematics
