Morningstar's "Perspectives" series features investment insights from selected third-party contributors. Here, Alan Higgins, UK CIO for Coutts gives his latest views on market moves.
Market moves over the past week showed the dangers of following the crowd, as investors rushed to take profit on some of this year’s best-loved trades.
German government bonds were unable to sustain their gravity-defying gains, giving up half of this year’s advance in the face of accelerating German inflation. The losses came despite continued uncertainty over whether Greece will reach an agreement with its creditors and stay in the Eurozone, which we believe they will.
Though the exact timing is impossible to predict, price falls for expensive safe-haven government bonds have seemed likely to us as economic recovery continues in the Eurozone and other major developed economies.
Given our outlook for further improvement in the global economy, we have favoured areas of the fixed income markets where the risks are more skewed to the upside, downside for yields.
Our view that the balance of risk for major government bonds is skewed to the downside was reinforced by their lack of support from some soft data over the past week that was generally weak apart from the as-expected 0.4% reading on German inflation.
The initial estimate of growth in first-quarter US gross domestic product showed a bigger slowdown than expected, to an annualised pace of 0.2% from 2.2% in the previous quarter.
Much of the weakness in economic activity was attributed to a harsh winter and the negative impact of a strong dollar on US exports, which became more expensive in foreign currency terms.
We don’t foresee a lasting slowdown in US economic growth, which should remain a major contributor to ongoing global recovery.
‘Sell in May’ Rubric Coming to Fruition?
Equities also fell across the globe over the past week, lending credence to the “sell in May” rubric, which has a decent track record according to our analysis.
Following the recent strong run in equities and rise in valuations, we have recently trimmed our overweight positioning in equities and put some of the proceeds in cash. Given a dearth of good investment opportunities, it made sense to us to keep some powder dry while waiting for better and more attractively valued prospects to appear.
Interestingly, UK equities outperformed the rest of the developed markets over the month of April despite the unusually high degree of uncertainty surrounding the outcome of next week’s general election. It looks like equity markets may be coming around to our view that the UK election shouldn’t have a significant long-term impact on UK growth and corporate profits.
Riskier Bonds Gain as Allure of Safety Fades
As bunds and other safe havens have lost some of their allure, investors have been turning their attention to higher-yielding emerging market bonds. Dollar-denominated emerging market bonds remain one of our favoured areas within fixed income, and they have been among the best performing in the year so far.
Though bunds have taken a hit, we still have a positive view on peripheral Eurozone bond markets. We believe they’ll continue to be supported by improving economies with low inflation and plenty of support from the European Central Bank’s €60 billion per month bond-buying programme of quantitative easing. But recent price movements show it may be a bumpy ride.
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