“Hence, we have reduced our exposure to health care stocks, which are expensive and traditionally face significant headwinds with a weaker dollar. Our biggest equity overweights remain Swiss stocks, a bet on quality growth, and materials – for exposure to China’s recovery.
“All bonds might look attractive against a backdrop of unprecedented monetary stimulus, but central bank support must be balanced against exceptionally high valuations. Also, the global economy appears to be on a path to recovery, which could cause bond yields to reverse course.
“Those contrasting signals keep us neutral on fixed income overall. Among sovereign debt, we favour US Treasuries. The Fed has been particularly aggressive with stimulus, and we expect it to deliver more in the coming months, most likely in the form of yield curve control.
“The stimulus should also be good news for US corporations, which are already benefitting from a pick-up in the economy. The US looks to be in better shape, supporting our overweight stance on US investment grade bonds – particularly as they have the backstop of Fed support should things dip again.
“We remain underweight US high yield. Although not expensive relative to its 20-year history, valuations do not factor in the potential for future defaults. The market is pricing in a default rate of just 7-8 per cent, but Moody’s expects it to reach nearly double that, at 13 per cent.
“In the currency market, the euro should benefit from an improving economic backdrop. Emerging market currencies, which are extremely cheap, could rebound, benefitting local currency debt.
“To guard against any renewed market volatility, we keep defensive positions in the Swiss franc (whose haven status is complemented by a strong uptick in the domestic economy) and in gold.”
