Investment Clock insights

De-risking for a Soggy Summer


Trevor Greetham

27 June 2018

Economic data continues to come in on the soft side of expectations, especially outside of the US (Chart 1 & 2). We think the business cycle has further to run but we wouldn’t be surprised to see a range trading market over what promises to be a soggy summer in economic terms and we have trimmed the overweight in equities in our Global Multi Asset Portfolios (GMAP) funds to its lowest level since they launched a little over two years ago. 
We see potential downside risk to stocks versus bonds over the summer (chart 1) and a possible drop in government bond yields (chart 2) as non-US central banks adjust to an easier path for monetary policy. 
Markets have sagged over the last couple of weeks but investors are not yet bearish, volatility is still low and US company directors are selling stock in their own companies. This leaves our composite sentiment indicator on the overbought side of neutral (chart 3). 
We have trimmed our overweights in stocks and commodities, adding to bonds. Regionally we’ve continued to de-risk over the last couple of weeks, selling emerging market equities, where we were already underweight, and other regions in order to add to our moderate overweight in defensive US equities.
We stand ready to buy a dip in stocks if pessimism gets out of hand.

Economic data continues to come in on the soft side of expectations, especially outside of the US (Chart 1 & 2). We think the business cycle has further to run but we wouldn’t be surprised to see a range trading market over what promises to be a soggy summer in economic terms and we have trimmed the overweight in equities in our Global Multi Asset Portfolios (GMAP) funds to its lowest level since they launched a little over two years ago. 

We see potential downside risk to stocks versus bonds over the summer (chart 1) and a possible drop in government bond yields (chart 2) as non-US central banks adjust to an easier path for monetary policy. 

Markets have sagged over the last couple of weeks but investors are not yet bearish, volatility is still low and US company directors are selling stock in their own companies. This leaves our composite sentiment indicator on the overbought side of neutral (chart 3). 

We have trimmed our overweights in stocks and commodities, adding to bonds. Regionally we’ve continued to de-risk over the last couple of weeks, selling emerging market equities, where we were already underweight, and other regions in order to add to our moderate overweight in defensive US equities.

We stand ready to buy a dip in stocks if pessimism gets out of hand.

 

 

Chart 1: Stocks vs Bonds and Citi Surprise index 

Chart 2: Global Government Bond Yields and Citi Surprise index 

Chart 3: Investor Sentiment and Stock Prices 

 

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.