By Michael Stanes, Investment Director at Heartwood Investment Management
The global economy is presenting a positive picture with both developed and emerging markets contributing to growth. The improvement in global conditions has coincided with rising financial market confidence. We appear to be in a steady state of equity markets grinding higher, gently rising bond yields and low volatility. Recognising that we are in an unusually extended market cycle, with markets now eight years on from their Global Financial Crisis lows, we believe that the improvement in financial conditions can continue in the near term, driven by excess liquidity, still dovish central banks and an improving global backdrop, with inflation not expected to run into the danger zone. That said, we acknowledge that valuations across developed market equity indices are looking more expensive and credit spreads are at historic lows (the yield difference versus the equivalent maturity sovereign bond). We are therefore comfortable with the current moderate risk overweight, but have little inclination to add further to risk levels.
Equities: Notwithstanding the positive and improving growth outlook, our view remains that a modest overweight in equity is appropriate. The ‘reflation trade’ continues to dominate the market narrative, despite the bond market showing some scepticism that the growth momentum can be maintained. Valuations and performance prevent a more positive stance toward equity overall, particularly with event risk in Europe and some uncertainty around the pace of US policy moves. We retain our positive view on US equities beyond the immediate future, maintaining our slant to cyclical stocks. We have also added to positions in healthcare, where we see long-term opportunities to benefit from ageing demographics and new therapeutic discoveries. Our overweight in European equities remains a contrarian trade, but we believe this region will benefit from a corporate earnings recovery as fundamentals improve. Similarly, we expect these trends to also support Japanese equities. We remain underweight in UK equity and believe it is too early to repatriate assets. In emerging markets, we maintain our overweight position but would not add to it at this point, given its recent resilience and possible risk of a trade policy shock out of the US.
Bonds: Interest rate policy divergence is emerging as a stronger theme in developed sovereign bond markets. Over the last month, US treasury yields have drifted higher on the re-pricing of interest rate expectations, while UK gilts, in particular, have outperformed despite a backdrop of increasing inflation. We believe that being short duration remains appropriate in the current environment of improving global growth and reflation. Credit markets should continue to be supported by improving economic fundamentals, although supply has weighed on some parts of the market more recently. In a Fed tightening environment, leveraged loans have seen notable outperformance. We continue to have select exposure to shorter-dated investment grade corporate bonds, specialist lenders and emerging market sovereign debt.
Property: UK property developers and listed vehicles have performed well of late, supported by better than expected fourth quarter results and the rally in UK gilt yields. Nonetheless, there are few catalysts that we can see in favour of this market over the medium term, given uncertainty around Brexit, and we believe it would be too soon to add. Our underweight in UK commercial property remains intact based on the supply outlook, especially in the South East. Across sectors, we continue to seek income opportunities in the industrials and offices. On a regional basis, we are invested in cities outside of London, which are less exposed to the ‘Brexit’ fallout. Outside of the UK, we are also looking at opportunities in the US REIT (real estate investment trust) market, although we remain wary of the impact of the Fed’s more hawkish stance.
Commodities: Until mid-March, the low volatility and tight trading range of the oil price have been noteworthy this year and we did not expect this situation to last. Concerns around inventory levels and the discipline of OPEC producers keeping to agreed limits are now testing the market’s resolve, leading to the oil price sliding to a three-month low. Despite the sell-off, we continue to expect that an improving global economic environment, reflation and a tighter supply/demand balance will ultimately be supportive to commodities this year. Direct access to this market is through owning futures contracts rather than the physical assets and while the risk/return profiles are looking more attractive across some parts of the complex, they are not yet at levels where we are ready to invest. We have, though, a position gold in some strategies for diversification.
Hedge funds: While we have held a limited allocation to hedge funds in recent years on concerns around performance, we believe that increasing interest rate divergence should create more opportunities going forward. Our preference remains for macro/CTA strategies, but we are also taking a more positive view on equity hedge strategies, given the greater likelihood of increased stock dispersion (i.e. between winners and losers), as well as credit long/short strategies.
Cash: We have reasonable levels of liquidity across our portfolios both in cash and short-dated bonds, which we are ready to invest as and when we see specific opportunities. Market volatility remains low, a situation unlikely to persist throughout 2017.
Current cryptocurrencies unlikely to last, Bank of England governor says
By David Milliken
LONDON (Reuters) – No existing cryptocurrency has a structure that is likely to allow it to work as a means of payment over the long term, Bank of England Governor Andrew Bailey told an online forum hosted by the Davos-based World Economic Forum on Monday.
“Have we landed on what I would call the design, governance and arrangements for what I might call a lasting digital currency? No, I don’t think we’re there yet, honestly. I don’t think cryptocurrencies as originally formulated are it,” he said.
Bitcoin, the best-known cryptocurrency, hit a record high of $42,000 on Jan. 8 and sank as low as $28,800 last week, far greater volatility than is found with normal currencies.
“The whole question of people having assurance that their payments will be made in something with stable value … ultimately links bank to what we call fiat currency, which has a link to the state,” Bailey said.
The BoE, like the European Central Bank, is looking at the feasibility of issuing its own digital currency. This would allow people to make sterling electronic payments without involving banks, as is currently possible with banknotes, and would in theory help avoid the volatility that renders bitcoin impractical for commerce.
Bailey said the appropriate level of privacy for digital currencies was likely to be hotly debated and was potentially underrated as a challenge in setting one up.
“This is a big one that is coming on to the landscape, the whole question of a privacy standard for transactions made in any form of digital currency, and where the public interest lies,” he said.
(Reporting by David Milliken, editing by Tom Wilson and Alistair Smout)
EU sustainable investment rules need better corporate data – banking report
By Simon Jessop and Kate Abnett
LONDON (Reuters) – European Union rules aimed at defining sustainable investments should help reduce “greenwashing” by businesses, but better quality corporate data is needed to ensure they work effectively, a banking report said on Tuesday.
The sustainable finance rules will classify investments that can be marketed as sustainable, a move aimed at steering much-needed cash into low-carbon projects to deliver the bloc’s climate goals.
From January to August 2020, 26 of the region’s biggest lenders tested the EU framework across a range of core banking processes, including retail banking, trade finance and lending to smaller companies.
As the main providers of finance to companies across the EU, the ability of the banking system to track and report on whether corporate activities are sustainable or not could prove crucial in assessing the rules’ success or otherwise.
The lenders broadly welcomed the regulations as they seek to align their businesses with the transition to a low-carbon economy, the report by the United Nations Environment Programme Finance Initiative and the European Banking Federation found.
However, they also raised a number of issues, many of which were data-related and could require a phasing in of reporting requirements.
While many large companies are already required to disclose certain environmental and social information by law, the bulk of smaller and mid-sized banking clients are not, hampering banks’ assessment of their alignment with the rules.
Concerns over the quality, detail and standardisation of data is also an issue when looking at banks’ lending overseas, something that would be made more complex as other regions launch their own regulations.
The banks who tested the EU rules called on regulators to seek global alignment of regulations, and for better tools to manage data from clients, such as a centralised EU database.
While under no compulsion to lend to activities that can be classed as sustainable, banks see sustainable finance as a growth area that is likely to take on more importance in coming years should policymakers tighten environmental legislation.
With more investors globally looking to become shareholders of companies with a good record on managing environmental risk, banks are also likely to look to reduce their exposure to environmentally or socially harmful activities over time.
The European Commission is expected to finish the section of the rules covering climate change in the coming months, before they take effect in 2022.
(Reporting by Simon Jessop and Kate Abnett; Editing by Pravin Char)
Bitcoin, crypto inflows hit record last week – CoinShares
By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) – Investment flows into cryptocurrency funds and products hit a record $1.31 billion last week after a few weeks of small outflows, as investors took advantage of the decline in bitcoin and other digital asset prices, according to the latest data on Monday from asset manager CoinShares.
Total assets under management (AUM) in the industry slipped to $29.7 billion as of Jan. 22, from an all-time peak of $34.4 billion on Jan. 8. At the end of 2019, the total AUM was just $2 billion.
Grayscale, the world’s largest digital currency manager, posted assets under management of $24 billion last week, down from $28.2 billion on Jan. 8. CoinShares, the second largest crypto fund, managed assets of $2.9 billion in the latest week, also down from $3.4 billion on Jan. 8.
“We believe investors have been very price conscious this year due to the speed at which prices in bitcoin achieved new highs,” said James Butterfill, investment strategist, at CoinShares.
“The recent price weakness, prompted by recent comments from Secretary of the U.S. Treasury Janet Yellen and the unfounded concerns of a double spend, now look to have been a buying opportunity with inflows breaking all-time weekly inflows,” he added.
Bitcoin dropped to a low of $28,800 on Friday, after scaling an all-time peak of $42,000 on Jan.8. It was last down 0.5% at $32,124.
About 97% of inflows went to bitcoin, the data showed, with Ethereum, the second largest cryptocurrency, posting inflows of $34 million last week.
So far this year, volumes in bitcoin have been considerably higher, trading an average of $12.3 billion per day, compared to $2.2 billion in 2020.
Glassnode, which provides insight on blockchain data, said in a report on Monday that bitcoin’s net unrealized profit/loss (NUPL) was getting close to exceeding the “belief” range and moving into the “euphoria” range.
Previously, when NUPL entered this range, it signaled a global top in bitcoin’s price.
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Richard Chang)
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