Nordea: Neutral balance mellem aktier og obligationer

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Our view since May 2018 has been to underweight equities in favour of long government bonds, which has been the correct decision for the period as a whole, but definitely not since late August last year. Equity markets have rallied on lower rates, perceived QE and a brighter manufacturing outlook. We have underestimated the power of TINA (“there is no alternative”) and also the risk of a “green” bubble being allowed to further inflate company specific valuations. The return on long-dated bonds has at the same time been phenomenal so far in 2020. We note that the general tendency continues to be that bonds react much more to negative news than equities, which shrug it off very fast. A continued strong USD and the earnings impact from the coronavirus could mean higher volatility in the short term. Beyond that, we note that our leading GDP indicators have started to improve, inflation is likely to stay low or be lower, and we see no signs that global central banks are considering a return to rate hikes. We advocate moving to a neutral allocation between equities and bonds.

Chart 1. Stock-to-bond return and macro surprises

Macro strategy: Confused on a higher level

A lot has happened since our 2020 Outlook was published. The US and China have agreed to a phase 1 trade deal, leading manufacturing indicators have bottomed, the Federal Reserve has expanded its balance sheet and the coronavirus is a new threat. Equities have rallied sharply, but so have bonds. Investor positioning has moved from underweight to overweight in equities. The macro environment is complex. Manufacturing should improve after a virus setback, but earnings trends are negative. There are indications of this perhaps spilling over to higher unemployment, which would mean weaker domestic demand.

Chart 2. Corona virus to have major Q1 effects

Since central banks continue to cling to a skewed reaction function, it is hard currently to see the TINA regime breaking down. We now advocate a neutral allocation between stocks and bonds. Downside earnings risks (owing to both the macro outlook and coronavirus effects), valuation and positioning are our main reasons for not advocating an equity overweight.

Equities: Rich pricing trims returns

Equity returns have been fantastic over the past year. Valuation multiples have expanded accordingly, and we believe the market must be considered richly priced, with most metrics at or above multi-decade highs. In other words, the air is thin and investors’ risk appetite could suffocate. However, the market is still being fed oxygen from multiple sources. The main life support failure that we believe could pull the plug on equity returns would be sharply rising interest rates, something we do not expect in the near term. Earnings risk persists, however, reducing the expected return to 3-5% over the next six to nine months.

Chart 3. Falling interest rates behind massive multiple expansion

Equity style: Fundamental styles set for comeback

We take a balanced view on equity styles for two key reasons: we do not assume any large interest rate movements in our forecasts and our analysis indicates that the current valuation setup in the market is fair. The valuation implications of earnings growth and risk differences have increased with lower discount rates. Compounding the implications of greater importance of beta and growth differences, we deem the current valuation discrepancies in the market fair. With justifiable valuation differences and key drivers not showing any clear direction, we argue that fundamentals could increase in importance and that a balanced style exposure including reasonably priced growth and quality should serve investors well going forward.