Global

Markets see long-term global growth prospects as having deteriorated materially, with policymakers unwilling or unable to do much about it. Meanwhile, recent economic data - U.S. notably - hasn't been that bad. A divergence between what matters to Wall Street versus Main Street explains the disconnect. Accelerating wage growth, lower commodity prices, and cheaper rates are positives for households - but not for many Wall Street sectors. Stay neutral global equities. T-bonds are a "hold" for now. The dollar's selloff is overdone.

The previous Insight showed that semiconductor top-line growth remains under siege. Worse, there appears to have been little effort to realign cost structures to slower sales. The latter will become even more critical in the coming quarters, because pricing pressures are set to intensify. Our global semi inventory proxy is accelerating. Slowing demand has not been met with a sufficient output reduction to rebalance the market. Utilization rates are hitting new lows, and Taiwan export prices have plunged. These trends are a significant pricing power threat, and will compound profit margin pressures. We continue to recommend a high conviction underweight. The ticker symbols for the stocks in this index are: INTC, TXN, AVGO, MU, ADI, SWKS, LLTC, XLNX, NVDA, MCHP, QRVO, FSLR.

Semiconductor stocks finished last year on a strong note, supported by a surge in M&A and hopes that low oil prices would spur an increase in consumer spending, particularly on electronics. While the latter has improved, the M&A backdrop is becoming more hostile as the cost and access to capital become more restrictive. We put this group on our high-conviction underweight list to reflect our concern that once M&A euphoria faded, a renewed focus on fundamental profit drivers would trigger a de-rating. Apart from better spending on electronics, the data continues to support our bearish call. Global semi sales are shrinking, with key producing countries like Korea and Taiwan suffering from a steep export contraction. That implies heightened liquidation pressures, which will undermine profit margins. Worse, semiconductor companies have been slow to downsize despite threats to top-line growth, adding to profit margin pressures, please see the next Insight. The ticker symbols for the stocks in this index are: INTC, TXN, AVGO, MU, ADI, SWKS, LLTC, XLNX, NVDA, MCHP, QRVO, FSLR.

Reduce portfolio duration to neutral, while also cutting exposure to European bonds (both in the core and Periphery) and Canadian government bonds.

Plunging commodities have been driven by increased supply and falling investor demand, not a major downshift in physical demand. Stay neutral global equities. The earnings outlook remains uninspiring, but bottoming oil prices and continued monetary stimulus support valuations. The selloff in global bank shares reflects NIRP-related "income statement worries", not "balance sheet concerns" linked to deteriorating credit quality. Downgrade Treasury notes to neutral. The rally in bonds has brought 10-year yields near our long-standing, out-of-consensus target of 1.5%. 

Special Report

Rebalancing in the oil market later this year will arrest the negative feed-back loop driving markets' inflation, interest-rate and FX expectations, particularly for non-OPEC oil-exporting countries.

Maintain an above-benchmark portfolio duration since, favoring markets with the highest real yields that stand out in a world where 65% of Developed Market government bonds trade with a negative yield.

It is highly unusual for equities to enter a bear market without the economy going into recession. Since we see the risk of recession as low, we recommend a neutral allocation between bonds and equities.

Last month, the model outperformed both global and U.S. equities in local-currency and U.S.-dollar terms. For February, the model is aggressively increasing its risk exposure and has included a bet on commodities for the first time since 2012. For equities, the largest overweight remains Europe, but EM and Canada enjoyed significant upgrades. For bonds, the model favors the European periphery.