One fourth of Investment Grade (IG) bonds have now negative yields; this radically alters portfolio considerations. The threshold for switching away from risky assets is higher than it used to be.
A global recession is not our core scenario, but monetary and fiscal support are required. We assume none of the three major risks (Brexit, US/China trade war, Middle East tensions) will materialize in the worst way.
In the upside-down world of negative yields, IG Credit is a new safe haven, as shown by relative low IG yield volatility. Equities remain cheap relative to bonds, and the Fed will remain more supportive than what the latest dot plot shows.
As a consequence, we prefer longer dated IG bonds over Sovereigns. Our mildly pro-risk allocation foresees an underweight in short-dated EUR Govies and cash. With the USD near its peak, Emerging Markets’ equities and bonds offer selective opportunities.