Monday, September 10th, 2012

Multi Asset Model Commentary 10/09/2012

(This commentary was written originally specifically for the US Dollar Multi-Asset Model)

Market conditions

This week sees a concatenation of three big event risks: the decision of the German constitutional court on the ESM, the Dutch Parliamentary elections and the meeting of the FOMC. To judge from the headlines, the results of any one of these events could send the markets into a nosedive. And yet investors seem strangely sanguine about it all. The historic volatility of risk assets is as low as it has been all year. Relative to risk-free assets such as the government bond in most “safe-haven” markets excess volatility is at a 52 week low. Our conclusion is that investors are not as worried as the headline writers think they should be.

Current positions

Within the portfolio there has been no real change over the last four weeks. The weighting of each asset class is within 2-3% of where it was in early August. Commodities have been increased and corporate bonds have been reduced, but the changes are not significant. US REITs retain their position as most favoured asset class, with corporate bonds in second place. Both of these share some element of in-between asset classes, not fully risk-on or risk-off, and in many ways that suits the current situation quite well.

Outlook

Markets seem to have formed the belief that the ECB has got ahead of the curve, at least for the time being. We can see no investment case for emerging market equities any time soon, and we are not sure we trust the momentum behind commodities. The economic outlook in the Eurozone remains as difficult as ever, but without a “clear and present danger”, we see no reason why US equities, REITs or corporate bonds should sell off dramatically. To us these event risks (and perhaps others in the future) look like a wall of worry, which the market will continue to climb, albeit slowly and painfully.

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