Asset Allocation
Mental Accounting Bias creates an irrational attraction to yield, while The Halo Effect incentivizes companies to generate yield. Neither phenomenon is sustainable. We identify three sectors to avoid, and two to own.
Commercial real estate and REITs have benefited greatly from accommodative monetary policy. Though they are approaching a peak, our analysis shows that they remain in a "goldilocks" scenario and still offer plenty of upside.
The lack of inflation makes a Fed rate hike before December unlikely. In the interim, the continued flow of liquidity could sustain the high-risk rally.
True inflation rates in the euro area and in the U.S. are actually not that different, making the polarized divergence in expected monetary policy very difficult to justify.
Shift to a small vs. large cap bias as a stealth way to play the overall equity market overshoot. The oversold bounce in banks is not worth chasing, and buy dips in medical equipment stocks.
U.S. inflationary forces remain tame, forcing the Fed to maintain an easy bias. Yet, the global economy is improving. This confluence could weigh on the dollar and boost commodity currencies. The NZD has more upside, but it will lag petro currencies. The BoJ will act, but timing is uncertain. Keep a negative bias toward the yen. CAD/NOK has more downside.
More aggressive monetary and fiscal stimulus will be necessary to resuscitate the Japanese economy. While the BoJ's forthcoming review is likely to endorse the current policy stance, there is a good chance that Kuroda will open the door to more radical measures. These measures will push down the yen, giving Japanese stocks a lift in the process. Sentiment on the U.K. economy has gotten too bearish. We are closing our short GBP/SEK trade and going long GBP/JPY.
The euro area's NPL problem is unlikely to be solved quickly, constraining bank profitability and the capacity to lend. There are three important repercussions for investors.
With 88 days to go until the U.S. presidential election our client meetings are starting to steer towards "all Trump, all the time." In this report we present evidence that Trump's electability is correlated with the chief global safe haven, the 10-year Treasury. Markets may be overreacting, however. Trump has a chance, but Clinton is the clear favorite. We also bust five myths about China's political system, in a continuation of our coverage of rising geopolitical risks in East Asia.
The tailwind of better-than-expected global growth and highly supportive monetary policy has the potential to push global spread product into overshoot territory.