There are still opportunities despite stretched valuations. Looking at the macro-backdrop and overlaying it with the stock market, we find that the current episode of moderation is not out of synch with history: we have seen this before. It is not out of the ordinary to see a growth moderation of the current magnitude.

1. Market Watch – JULY 2017
There are still opportunities despite stretched valuations. Looking at the macro-backdrop and overlaying
it with the stock market, we find that the current episode of moderation is not out of synch with history: we
have seen this before. It is not out of the ordinary to see a growth moderation of the current magnitude.
More to the point is whether or not, as equity investors, we should be fearful of significant downside risk
from here on in. The numbers are reassuring to some extent: past history does not contain too many
instances where the market drops appreciably, apart for the summer of 2010 when it declined sharply.
Otherwise, the broad conclusion is that carry strategies perform better than a blanket exposure to US
stocks. The comparison is with HY bonds and US high dividend equities. The message: stay cautious, but
don’t panic. A period of moderation is different from a recession, and we are not calling for a recession.
Our overall allocation to equities has been underweight. The call has been driven largely by our
skeptical view of earnings expectations embedded in the market. More latterly our view of a
moderating economy has added to the strength of conviction and hence we have not added to risk.
Finding value in a fully-valued market is a challenge. To ensure a safe outcome in the long run,
diversification is much more important than timing the market. By holding too much cash as a defensive
strategy, investors risk long-term harm by being under-invested.
It is true that in turbulent times extra caution can yield positive results, but this assumes one has the ability
to know when to increase cash levels, and when to stay invested. Over time, this is difficult to achieve
consistently.
This does not mean that we are advocating a blind insistence on staying in the market at all cost. Risk
appetite and tolerance plays a role, as does liquidity – the ability to draw on investments on a rainy day.
A better investment philosophy is to look for additional sources of diversification in portfolios. Long term
returns will be enhanced, without necessarily taking uncomfortably high levels of risk.
However, that did not preclude us from being active through sector rotation and pursuing carry
strategies. For example, we have been rotating actively in Singapore and Chinese equities, Global
Technology (downgraded to neutral) and Energy (upgraded). And of course we remain positively
disposed to high yield bonds.
Marc Van de Walle
Global Head of Products
Still hunting for value
STRATEGY
Stay defensive. Focus
on carry and rotation
as markets enter
consolidation phase
FIXED INCOME
Expect positive but lower
returns from EM bonds
over the rest of the year.
Overweight Latam
FX
Potential for mini USD rally
even as EUR will likely
emerge as the winner over
the next year
EQUITY
Cautious stance due to
moderating growth
and reduced monetary
policy support

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