The post-Brexit world creates a sweet spot for high yielding assets. There is enough good economic data to take recession risks off the table, but also enough uncertainty to keep central banks in easing mode. As long as these macro conditions remain, the hunt for yield will continue.

1. Market Watch – September 2016
Good Yield Hunting
STRATEGY
Tactically turning
less cautious.
Position for an
income-focused
strategy
EQUITY
Overall remain
negative on equities.
Prefer the US over
Europe
FIXED INCOME
Cut cash to neutral
and increase
allocation to fixed
income in search of
yield
FX
USD weakness ripe
for some reversal as
Fed rhetoric grows
less dovish. Stick to
“good” carry
The post-Brexit world creates a sweet spot for high yielding assets. There is enough good economic
data to take recession risks off the table, but also enough uncertainty to keep central banks in
easing mode. As long as these macro conditions remain, the hunt for yield will continue.
The persistence of record low bond yields has compelled investors to take on greater risk in their
pursuit for yield. This poses a dilemma for investors: accept lower returns or dial up risk in portfolios.
We want to tread carefully in this more uncertain environment. Although we view equity markets
generally as fully valued, we do not yet want to downgrade further, as there is enough growth to
prevent an outright contraction in earnings. Therefore, we are not turning more negative on our
tactical equity underweight. We expect equity markets to trade sideways with heightened volatility
and we prefer to focus on income over growth.
While some equity markets have been reaching all-time highs, credit assets have been performing
equally well. On a risk-adjusted basis, we prefer credits over equities, as credit spreads still have
scope for more compression, while equity valuations are now at elevated levels.
The current positive market momentum is strong and market complacency may last for a while.
However, some restraint and selectivity is necessary as the investment cycle is maturing and there
are significant economic and political risks, such as the looming the US elections and Fed rate hike
cycle.
There are still pockets of opportunities. We remain constructive on Emerging Market (EM) fixed
income given the worst of the EM fundamental downturn is likely over, with signs of a modest
growth pickup, while EM central banks is expected to ease further. The effects of US Fed rate hike
would create some EM volatility but any dips should be viewed as an opportunity to selectively add
EM bond exposure.
As markets grind higher, we urge investors to stay vigilant and position for an income focus
strategy. We stay underweight on equities. We want to deploy our cash into investment grade
bonds for carry and we become less negative on Developed Market (DM) high yield bonds. We
maintain our overweight stance on emerging market high yield bonds. On equity regions, we
continue to stay underweight in Europe, in favour of the US.
Marc Van de Walle
Global Head of Products

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