Focus on multi-asset – Gold, high dividend and eurozone credit: SG’s seven key calls for September

In the current economic scenario, “Don’t be too greedy, go for value” says Alain Bokobza, head of global asset allocation at Société Générale (SG), which recommends to include yield strategies in a multi-asset value approach.

While the US, China and Italy remain at the centre of the political stage, Bakobza expects the signing of the request for assistance by Spain to be met with relief.

“The issues linked to the method used to assist Spain are significant because the previous ‘memorandum of understandings’ signed by Greece, Portugal and Ireland produced very mixed results. Will the governments have learnt lessons from past mistakes? The firm announcements made by the ECB of unlimited purchases of bonds from weakened countries and the entry into operation of the European Stability Mechanism (ESM) have brought hope,” he says.

This will have an impact on multi-asset portfolio strategies. The manager suggests to tactically reweight equities but to structurally prefer bonds, to build in protection from highly volatile foreign exchange markets.

“After the very sharp sell-off of EM equities, and ahead of a pick-up in stimulus policies, we increase our weighting on EM equities while continuing to Underweight them overall,” he says.

Here are the bank’s seven key calls in the current economic scenario:

1 – Long 3y Spanish government bonds
The ECB announcement that it will provide unlimited support for peripherals is not quite priced in yet. Once Spain requests EFSF/ESM support and Outright monetary transactions kick in, we would expect another rally, more so in sub 3-year bonds. So, even for a country like Spain the impact should be positive. Target 2.5% or below on the SPGB 4% July 2015. See link.

2 – Buy high dividend, high quality stocks
While investors are starving for yield, we recommend a basket composed of equities that should generate safe income, protect capital, and grow over time. Quality Income stocks have both bond-like (income and capital safety) and equity-like characteristics such as capital growth.

3 – Long Eurostoxx 50 / short S&P 500
The outperformance of the Eurostoxx 50 over the S&P 500 should continue on the grounds of significant relative undervaluation and lower concerns on the eurozone. The S&P 500 has been fairly resilient lately despite the negative newsflow on the US economy and expectations of a fiscal cliff.

4 – Buy gold, while hedging the implicit USD exposure
Gold should benefit from additional monetary easing, especially in the US where the Fed is willing to embark on a third phase of quantitative easing.

5 – Short Australian dollar/ Long US dollar
The Australian dollar is defying gravity in the face of the deterioration in the US and global manufacturing cycle. Meanwhile, the SG proprietary fair value models suggest the AUD is overvalued in the order of 25% versus the USD.

6 – Buy investment grade credit in the eurozone
Credit has outperformed equity over recent quarters and has been seen as a defensive asset class. Although it may underperform the European equity market if the positive momentum continues, we believe it is still appealing in the context of investors looking for yield and safety. It also provides a good hedge should the mood reverse. By this key call, we also capture the expected fall in risk premia in the eurozone periphery

7 – Short Hungarian forint/ Long euro
The euro is finding support in the commitment of the ECB to keep the eurozone afloat, while the Hungarian forint is exposed to significant risk aversion. The country came close to a currency crisis at the end of 2011 and is still in the process of negotiating a financial package with the EU / IMF. Despite low investor confidence, the central bank unexpectedly cut rates at end-August.

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