Voya Multi-Asset Perspectives - April 2017
The “reflation” trade which has led risk assets to gains year-to-date, at least domestically, has taken mild respite. Our investment themes still hold a positive bias toward equities but we have begun rotating away from our long-held U.S. equity position toward the emerging markets and Europe. Our central view is that the United States is in a renewed leg of an expansion, but growth is now more synchronized across the world. We think this may herald a significant period where the rest of the world plays catch-up to the strong returns the U.S. has delivered over the past five years.
On monetary policy, the Federal Reserve raised interest rates by 25 basis points at the March meeting and we expect two more interest hikes this year. Regarding fiscal policy, the recent failure of the Trump administration’s healthcare bill is a double edged-sword. On the negative side, the abrupt pulling of the bill may tarnish Trump’s reputation as a dealmaker and put into question his ability to pass other legislation, but the positive is the administration appears to be moving on to tax reform and infrastructure spending. It’s not surprising to see the stock market give up some of the almost 10% post-election gains on this stumble.
Politics will remain front and center for the financial markets. The Dutch general election in March served the first defeat to the populist movement in Europe, with Mark Rutte’s Party for Freedom and Democracy edging out Geert Wilders far-right Freedom Party. In France, the independent candidate Emmanuel Macron is currently favored over far right candidate Marine Le Pen to win in the second runoff ballot. Prime Minister Theresa May finally invoked Article 50 of the Lisbon treaty and officially began the negotiation period that will result in the U.K. leaving the European Union. However the negotiations proceed, the final judge is likely to be the currency markets. The pound bears close watching for signs of stress.
Domestic risk assets cooled off in March. The S&P was basically flat, while commodities were down about 2.6% and high yield was down 0.2%. Shortly after the eight-year anniversary of the start of our current bull market, it may be tempting to look at March as a stall or wobble through the lens of a market top. We are not of this opinion, however, starting off with the old adage “bull markets don’t die of old age.” Earnings are broad-based across many sectors; while economic survey results are running well above the hard economic data, we see strength in housing and jobs. New home sales recorded an impressive 6% gain in February. Importantly, positioning is not extended from a contrarian point of view. According to Merrill Lynch, global equities have recorded less than half of the inflows of global bonds since 2009, leaving ample headroom for rotation back to risk assets.
European equities have finally shown earnings growth and for the first time in years are set to grow faster than U.S. stocks. The French election in April and second round in May are important events: Le Pen is likely to make it past the first round on her solid base of support but unlikely to clinch it in the second round. Emerging market (EM) equities have recently benefited from a weaker U.S. dollar, and will have a much easier go of it with Russia and Brazil out of their recessions. We also see a number of EM central banks having the ability to ease monetary policy this year.
Ten-year U.S. Treasury yields have traded in a narrow range of 2.3–2.6% since December, retreating most recently to 2.4%. The Treasury yield curve has flattened year-to-date yet remains considerably steeper than a year ago. High yield spreads have widened 45 basis points since briefly touching cyclical lows at the beginning of March. We see this as possibly an entry opportunity rather than a cautionary sign, as defaults still remain low and corporate health should improve as profits continue to grow.
Multi-Asset Strategies and Solutions Team
Voya Investment Management’s Multi-Asset Strategies and Solutions (MASS) team manages the firm’s suite of multi-asset solutions designed to help investors achieve their long term objectives. The team consists of 25 investment professionals that have deep expertise in asset allocation, manager selection and research, quantitative research, portfolio implementation and actuarial sciences. Within MASS, the Asset Allocation team, led by Barbara Reinhard, is responsible for constructing strategic asset allocations based on their long term views. The team also employs a tactical asset allocation approach, driven by market fundamentals, valuation, and sentiment, which is designed to capture market anomalies and/or reduce portfolio risk.
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