FocusPoint
Monthly Investment Newsletter September 2010: How to position for further disinflation?
• Companies have to show more confidence
• Extremely low bond yields are likely to persist
How to position for further disinflation?
The risks for the US economy were already high but have even increased recently. Although US consumers have the ability to spend, the question is: are they willing to do?
Policy risks are high as well. Trying to support the economy, the Federal Reserve has come into uncharted territory, given that interest rates are already at extremely low levels.
Growth worries are not restrained to the US economy, but are present in Europe (except Germany!) and Japan. Fortunately, central banks are fully aware of the growth and deflation risks. These risks are behind the declining bond yields.
10-year bond yields are at all-time lows: so low that the average dividend yield is higher than the bond yield in Europe, the UK and Japan.
In our opinion, a lot of the negative news has been discounted in equity prices. However, a double dip / deflation scenario in the US has not yet been priced in. The estimated risk is low (approximately 30%).
How to position in this environment? We have an overweight position in emerging market equities. In an environment of persistent disinflation in the developed economies, emerging markets’ strong fundamentals are becoming more and more obvious.
Recently, we increased our defensive bias in our sector allocation by upgrading the utility sector (to neutral) and downgrading the financial sector (to underweight).
In our mixed portfolios we are neutral equities versus fixed income. We are also neutral real estate equities and commodities. Within commodities we have a small overweight in gold.
On a 12-month basis, we expect persistent low bond yields. In our broad fixed income portfolios we maintain overweight positions in investment grade credits, high yield bonds and emerging market debt. We are positioned for a further flattening of the yield curve.
In our equity portfolios we prefer companies with strong balance sheets, low operational leverage and low financial leverage. High Dividend Strategies are well positioned to outperform in the current environment.
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Senior Investment Specialist Ad van Tiggelen about Asset Allocation in October.