Investment strategy: Regional sector allocation: Underweight commodity-related sectors
Christoph Riniker, head Equity Strategy Research, Julius Baer
Remaining cautious on commodity prices, it is not only the energy sector suffering from them but also materials. Based on the outlook on oil, we have reduced the rating for energy to underweight lately. Yesterday we’ve downgraded the materials sector to underweight, too. We do not see marked price risks on current levels but rather better investment opportunities elsewhere. Factors supporting this stance include valuations, deflationary tendencies and commodity prices. In contrast we see that the telecom sector has improved recently. We are upgrading it to neutral for the time being.
The sector has one of the highest dividend yields but elevated payout ratios leave limited room for more. The telecom sector has become less defensive over time. Therefore the dependency from rising bond yields is not as pronounced anymore as it was previously. Immense investments in the mobile 4G networks should bear fruits predominantly in Europe and Asia. Regulatory uncertainty remains a headwind in the United States.
Overall, we have reduced our cyclical bias but remain well underweight defensives as we expect bond yields to rise going forward.
Fixed income: USD bonds: The calm before the storm? Stay in quality and hold your nerves
Markus Allenspach, head Fixed Income Research, Julius Baer
On the surface, the US bond market eyes today’s labour market report (see economic article above). The Fed has been stating time and again that the decision to raise rates remains ‘data dependent’, and that labour market conditions are crucial. We all know that wage pressure, however, is very benign and that incoming data are consistent with sub-trend growth. Macro data to a large extent argue against a rate hike in September, making the Fed decision rather a political one.
This is one element that unsettles the market. The second element is the collapse of commodity prices. For some participants, the decline is positive for government bonds as inflation expectations are bound to decline. For others, the implication is negative as an increasing number of issuers in the energy and mining space are at the brink of collapse.
Moreover, the weakness of commodity prices is also seen as a sign of broad-based weakness of global demand, and therefore a negative for the general outlook for corporate profits. We thus see a widening of credit spreads, particularly in the energy and basic industry segment.
Investing in energy and mining issues is catching a falling knife at this juncture. We stay in more liquid segments such as USD high-grade bonds or where the policy of the central bank is more predictable, such as European peripheral debt.