Monday, June 25th, 2012

Multi Asset Model Commentary 25/06/2012

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

Market conditions

Last week, every asset class produced a negative return apart from investment grade corporate bonds. This is pretty unusual in itself, but even more so considering that the pre-announcement season in the US has not started well, with a significant increase in the number of profit warnings relative to Q1. In theory this should reduce the creditworthiness of US corporations. However there is one ray of good news: excess volatility – the extra risk of being invested in risk assets – continues to fall. In the case of emerging markets it is now half its level of mid-March.

Current positions

With the decline in excess volatility comes the first tick-up in the exposure to risk assets, with REITs and US equities benefitting to the tune of a couple of percentage points each. The sell-off in emerging markets in April and May was so powerful and so violent that it will take longer for an increase in risk appetite to show up here. In terms of current positioning, the order remains US Treasuries, REITs and investment grade bonds, as it has done for the last few weeks.

Outlook

We suspect that over the next few weeks, the focus of capital markets will shift away from the Euro-crisis to the health of US corporate earnings. Although the summit season is not over, there is little prospect of any hard news (almost a contradiction in terms in Europe) being released before the summer.  We assume the ECB will cut rates soon, but this hardly ranks as earth-shattering news. A few weeks concentrating on earnings per share and balance sheets may come as a welcome relief to investors, who are fed up with an endless macro crisis. We will have time to analyse Q2 earnings before tuning back in for the now customary currency crisis in August.

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