The document discusses market conditions in June 2017. It notes that markets have hit new highs but further upside is limited given moderating economic growth and uncertainty around political reforms. Earnings have supported equity valuations so far but margins are at risk. Low volatility and rich valuations leave little room for error. The strategy discussed focuses on carry through dividends and fixed income, rotating between outperformers and laggards, and hedging risk through volatility and diversification.

1. Market Watch – JUNE 2017
With markets hitting new highs and most assets looking fully valued to us, we are sceptical that prices
can continue to go higher. The rally in risky assets since the end of last year was largely due to the
improvement in the economic cycle. However, with growth moderating and the increasing likelihood
that President Trump cannot enact big economic reforms, it is difficult to see much market upside.
Equity valuations are challenging, although the strong first quarter 2017 earnings were good enough to
offer support. As a result, major markets have been trapped in a broadly sideways range. We believe
this trend of consolidation will persist as the current pace of earnings will be hard to sustain. This is
particularly a possibility given our view that the macroeconomics backdrop is as good as it gets, with
the risk of pressure on profit margins.
Unusually low volatility and relatively rich valuations across asset markets leave little margin for error.
Concerns about market valuations are likely to return to the fore, which is why we remain cautious with
our asset allocation.
What performs well in a sideways market are carry strategies: the ones designed to pay income in the
form of coupons or dividends, which are less exposed to outright equity market risk. Many of these
strategies are still available. More defensive dividend ideas, rotating out of outperformers into laggards,
and the simple fixed income strategies around high yield and emerging market bonds. Volatility is one
of the few asset classes currently at an all-time low. This offers the opportunity to hedge against tail risk or
to take a directional bullish view on volatility.
To capture value in a fully-valued world, the investment strategy is look for returns through carry and
rotation. At the same time, manage risk by lowering bond duration, buying hedges, and diversifying
using private equity and hedge funds.
Marc Van de Walle
Global Head of Products
Capturing value in a fully-valued world
STRATEGY
Target carry strategies
as markets consolidate
with moderating
growth momentum
FIXED INCOME
High yield suported by
modest spread tightening
and lower than expected
default rates
FX
More positive on EUR due
to lower political risk and
better economic
fundamentals
EQUITY
Remain cautious and
hold back for a better
entry opportunity.
Rotate into laggards

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