Outlook: Risk assets cheap, safe assets expensive, says Lyxor

The quest for safety in a persistently policy-driven, uncertain environment is likely to keep risk premiums on risky assets elevated, say strategists at Lyxor Asset Management.

“Over the next several months, we see no catalyst to drive risk assets substantially higher in a sustained fashion,” noted Jean-Marc Stenger, deputy head of Alternative Investments. “Risky assets are cheap and safe assets are expensive, but we believe these conditions are likely to persist in the near term.”

The frim remains broadly constructive on the global economy, but seeing modest growth at best, with “obviously deteriorating momentum” and below potential prints of economic data across the globe.

Markets will look to policy makers to do the right thing after all other options are exhausted. The result is likely to be range bound markets with sentiment-driven reversals.

“We believe that the slow-motion progress on the political front is insufficient to reverse the economic downturn in the eurozone. Deleveraging by banks and self-defeating fiscal restraint will likely deepen the recession, research from the firm said.

The escalating euro debt crisis is taking its toll on the global economy. The current soft patch is severe and broadbased, hurting developed as well as emerging countries. On the positive side, inflation is receding, paving the way for policy easing, which should allow the expansion to regain some momentum before yearend.

“The major uncertainty for the world economy seems to lie with the US where, after a catch-up phase, businesses have put the brakes on hiring and investment,” Lxyor’s note said.

The US soft patch should prove short lived, but the expansion will likely carry on at a sluggish pace. Moreover, fiscal retrenchment will start in 2013, which constitutes a significant tail risk for the world economy.

The firm views hedge Funds as a crucial component in portfolio construction. “We are still stuck in the middle of a structural deleveraging both on the
private and public sector side,” explained Stenger. “This weak growth environment is probably going to be with us for a prolonged time span, capping the upside to risky assets.”

Even so, markets could offer sometimes prolonged tactical trading opportunities after sharp selloffs, and these are opportunities hedge funds could capture.

“The most attractive portfolios right now include both alpha generating, steady earner strategies to provide income, as well as managers who can swing their portfolio exposure to take advantage of short-term tactical opportunities” said Stenger.


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