July 2016: Low visibility

As we head into the deep summer months, markets remain delicately poised. The vote for Brexit proved a clear shock, throwing up all manner of potential ramifications. On the other hand, however, the global economy is still proving resilient. Growth is set to continue, albeit not at a blistering pace and with some areas of concern.

A further positive factor is that in contrast to previous eras we now have policymakers used to putting out fires. In fact, since 2008 and a whole array of crises, there is now a sizeable support infrastructure able to provide an adequate response. Thus, with the fallout from Brexit still clearly liable to weigh on markets, central banks are standing by, ready to deploy increased easing measures, particularly in Europe. Having said that, we are also looking for more decided action from the EU itself: in order to mitigate knock-on effects from Brexit, reform will need to be forthcoming – Brussels needs to show it is adaptable in order to moderate market concerns.

Indeed, what the vote for Brexit implies is a clear disconnect between ordinary people and their elites, largely attributable to a rise in inequality, which has the potential to result in increased instability. The rise of Donald Trump is part of this phenomenon, meaning political risk is not only a concern in Europe, but across the Atlantic as well. Consequently, there are enough reasons to be cautious over the summer, so we recommend staying neutral across the asset classes. Visibility is low.

This cautious stance is further highlighted in our new equity allocation. We take down our overweight stance towards European equities off the back of heightened risks related to Brexit and re-allocate towards US stocks, which are significantly more defensive in nature.

As for our stances vis-à-vis bonds, no changes are in order. Government bonds continue to be underweighted due to anaemic yields; investment-grade corporate bonds are preferred, providing stability to a portfolio, but also a yield pick-up. EMB are at neutral; fundamental risks vs Fed action is a balancing act. High-yield credits are set at neutral: higher energy prices are a tailwind but there are signs that balance sheets are deteriorating.

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Catch up on recent developments in the world’s financial markets, with news, views and the outlook for bonds, equities and foreign exchange, as well our latest asset allocation recommendations, in this month’s GAAS. The GAAS provides a general view of current conditions in the financial markets. It is essentially client-neutral. Discretionary Portfolio Management clients of Nordea Bank S.A. should therefore note that, due to specific risk profiles or personalised asset management solutions, the investment policies pursued on their behalf may differ significantly from the recommendations proposed in the GAAS.