Rothschild Wealth Management is keeping a high allocation to cash, short-term bonds and gold, saying a "dangerous complacency" has taken hold of markets.
RWM is not the only allocator to say an unusually quiet Vix volatility index suggests high apathy.
But Wiedmann said equity valuations are undemanding – “more or less fairly valued trading at levels usually associated with good long-term returns” – and the asset class looks very appealing compared to bonds. Europe is cheap, the US slightly overvalued. EMs’ discount to developed markets is around 15% – “very attractive given emerging markets’ superior economic performance and outlook and generally better fundamentals.”
Unsurprisingly, RWM says the eurozone’s crisis is a major hurdle to more risk tolerance. Policymakers might have bought time, but RWM says “little real progress is being made in tackling the fundamental problems behind the eurozone crisis”.
The ECB’s LTRO program, too, has “helped to diffuse some of the tensions within the currency union [and] underpinned the rally in risky assets”, and Italian and Spanish sovereigns – arguably now ‘risk assets’ – have rallied as banks bought them to use as loan collateral.
But in the longer term, Wiedmann said, LTRO may have very negative consequences.
“The funding facility potentially ties the fate of the banks much more closely to the region’s governments, rather than seeking to lessen the impact of a sovereign debt default on the banking system. The result could conceivably be ‘zombie banks’ that hold on to weak assets, an outcome that would drag on credit creation and economic growth for many years to come.”
If inflation spikes over time, “faith in the currency could then evaporate”.
Similarly, Greece’s latest €130bn of bailout cash may “buy some time, but they are throwing good money after bad and simply delay the inevitable. There is a clear risk that current or future Greek governments don’t carry through on their promises of deeply unpopular reform, and there are many loose ends that could still unravel.”
Even if all recuperative measures are enacted, a debt trap is avoided, Greece finances its deficits and Its economy grows, Wiedmann says “Greece will still remain deeply uncompetitive within the eurozone and its debt burden will be unsustainable, at 120% of GDP in 2020.
“Bond markets are unlikely to trust Greece for a very long time, and the country will remain on life support.”