Equities
Recent equity performance has been much more nuanced than the traditional value/growth debate has suggested – with higher bond yields giving some support to the valuation of more cyclical cashflows – but with recent technology earnings again demonstrating the strength of their market positions and growth potential. Aymeric says they are not currently expressing strong regional or style preferences in this environment characterised by short series of style rotations and are now past the point of early cyclical recovery and have entered a more mature phase of the cycle. The UK and US are the marginally preferred regions but the multi-asset team advocates the need for balanced exposure to value and growth. From a regional perspective, the preference for DM over EM equities remains but is fading and are mindful of regulatory threats in China, the weak COVID trends in EM countries and the difficult healing journey ahead, but note increasingly bearish investors sentiment and oversold price action. In terms of granular investment ideas, the baskets that have had some cyclical exposure like metals, industrial automation, future mobility or cyclical sensitive, are close to fully discounting the post COVID growth improvement. Aymeric states that they are currently re-examining each of these thematic universes to identify the growth opportunities and may also reconsider their overall exposure if global economic activity slows further. Baskets with more stable and reliable earnings growth like stable quality and quality growth are favoured.
Volatility
US S&P500 and 10-year Treasury volatility is expected to rise modestly over the next six months. In the case of equities, this marks a small reversal of the downward trend experienced over the last year or so. However, in the case of Treasuries, the view points to a continuation of an uptrend that has been in place for several months. Recently, the multi-asset team at abrdn has shifted towards a more balanced stance, recognising the low absolute premium intake and the upside risk in realised volatility. As volatility stabilised recently, strategies that harness the volatility risk premia by selling calls and puts in equity markets, or strangle on bond yields performed well and they are seen to offer additional sources of carry. As short term volatility sees under-pricing inflation or growth related negative surprises, Aymeric says they may review some of the strikes being implemented and will remain cognisant of a less favourable risk reward balance.
Rates and Inflation
Aymeric says that given the diminishing rate of economic growth and ongoing central bank support, in his view duration is kept neutral with low conviction. Diverging macro and virus related drivers suggest the implementation of carry and relative value rather than directional strategies – although recent broad weakness across rates markets does heighten the valuation debate, particularly if one remains of the view that inflation will prove transitory. Aymeric’s current curve strategies express different inflation scenarios but also different regional policies and epidemiologic strategies.
The pace of reopening, ongoing supply chain issues and tight commodity inventories keep pushing European and UK inflation breakeven rates to multi decade highs. US implied inflation however seems to have peaked as expected in June but a change in CPI is expected to remain high and sticky. At current valuations, Aymeric sees some asymmetry in UK inflation, short versus Euro inflation, but remain cognisant of the upside risk lingering into 2022.
