Asset Allocation 4Q19: Riding the unloved rally

The "unloved" bull: Investors' equities exposure remains light
Chief Investment Office07 Oct 2019
Photo credit: AFP Photo

Global risks assets rallied this year despite persistent headwinds posed by the US-China trade conflict, which has been a significant drag on investors’ sentiments and business confidence. Global equities managed to gain 12% while corporate bond spreads also tightened by 34 bps on a 8M19 basis. Opinions on the sustainability of this up-move, however, remain divided given broad-based softening of macro momentum and lingering geopolitical uncertainties.

Figure 1: Global bonds and equities have undergone a substantial rally this year

Source: Bloomberg, DBS

Indeed, fund flow data from EPFR Global show that this is an extremely “unloved” rally as investors’ positioning in equities remains light. Since the trough in December, global bonds and equities have rallied in tandem (Figure 1). In theory, this implies a resurgence in risk appetite across the board. However, flow data suggest otherwise. While USD278m has entered global bond funds this year, equities funds registered net outflows of USD152m. This suggests that institutional investors have not participated well in the rally in equities.

Portfolio allocation data painted a similar picture. Within global equities funds, portfolio managers have, on average, slashed their Overweight positioning on US equities from a peak of 53% in August 2014 to an Equal-weight currently. On the other hand, their 19% Underweight positioning on Europe has been raised to an Overweight of 17%. But this move proved untimely. Since end-August 2014, US equities have rallied 44% while Europe’s gained only 7%.

The flow data show that global portfolio allocators have, on balance, failed to capitalise on the significant up-move in US equities over the past few years. But as the S&P 500 Index continues to rise, the pressure for index tracking funds to “chase” the markets will increase.

In the coming quarter, we believe that the following themes will dominate the narratives:

1) The return of monetary easing and its impact on equities
2) Rise in negative-yielding bonds: A paradigm shift for global income equities?
3) Yield curve inversion: Imminent risks on the horizon?

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