Voya Multi-Asset Perspectives - May 2017
Global risk assets brushed off a sluggish March and rebounded in April, decisively so after the first round of the French election. Emerging markets and Europe continued their leadership among global equities, while U.S. high yield spreads tightened. U.S. firstquarter 2017 GDP came in at 0.7%, below consensus estimates of 1.0%. A weak 1Q print was widely attributed to seasonality and warmer winter weather.
Risk assets globally breathed a sigh of relief after the results of the first round of the French election. Emmanuel Macron and Marine Le Pen will compete in an early May run-off, with Macron favored to win. The euro jumped on news of the election results, signaling that investors perceive diminished risk of France initiating a referendum to leave the European Union (EU). In a surprise move, U.K. Prime Minister Theresa May called for a snap election in June, under the guise of needing an elected and unified front to negotiate the most favorable terms during the Brexit proceedings.
The domestic fiscal landscape continues to evolve. Moving past its failure to push through healthcare reform, the Trump administration recently proposed an outline of tax reform, which included tax cuts for individuals and businesses. To help pass spending legislation that would avoid a government shutdown, the administration signaled it would be willing to wait for federal funding for the proposed border wall with Mexico; and stepped back from rash comments on withdrawing from NAFTA in favor of renegotiations, soothing Mexican peso and Canadian dollar foreign currency markets.
Our portfolios continue to hold a bias toward risk assets. In the United States, we are nearly halfway through 1Q earnings season and the results have been quite good. We are seeing broad-based earnings and sales growth, which is a dramatic improvement over this time last year. In fact, 51% of companies so far reported have beaten estimates on both earnings and sales, whereas historically only 35% have beat both. This earnings strength is also extending beyond the U.S., and we are seeing net positive global earnings revisions for the first time in two years. As we see continued signs of global strength we are maintaining our positions in Europe and emerging market equities. Fund flow data indicate that these two asset classes are starting to get attention from institutional investors; we think the flows resemble covering of underweight positions rather than ebullience.
Bond yields were a big topic of discussion as the U.S. Treasury 10-year yield fell during the month. While bond yields are off of their recent lows of 2.17%, the move was meaningful especially in light of equity markets that were not in distress. We think the factors suppressing bond yields have been the inflation data (CPI and core personal consumption expenditures) looking like they may have peaked, bonds receiving stronger flows than equities, French elections and lastly, the quickly closing legislative window to pass any kind of tax reform in 2017. Does any of this change our view on bonds? Our models and quantitative work tells us that U.S. Treasury bonds are not likely to produce much beyond their coupon rate for this year, which is just about the 2% return they have already delivered year-to-date. The longer-term concern with the U.S. economy now at full employment is rising wages, offering clear signs that bond yields will likely be higher than current levels over the summer. The potential catalyst may be the second round of the French election, the U.K. election, or the next U.S. employment report. Thus, we stick with our positive view on senior loans that offer credit exposure and lower duration than competing fixed-rate asset classes.
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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