The flock of doves returns
- The flock of doves has returned: the Fed, ECB and PBoC are sending strong signals that in a low-inflation world, they can afford accommodative policies that can keep the near-record growth cycle alive. Investors are giving them thumbs up.
- Friendly policy news is now well priced in, but risk assets can still benefit from a stabilization in economic data and investor flows. To the data- and flow-less rally of Q1 can follow a more muted recovery in Q2, as investors desperately seek alternatives to depressed bonds yields.
- 2016 is not 2019: We do not expect the rally to be so long-lived, if only because profits will not enjoy the same re-bound this year. But if dangerous icebergs can be avoided, as we expect, then the rally will not melt. Tail risk is get-ting a bit fatter, but we still see a Crash Brexit as unlikely.
- Yields cannot rise much, including in Europe where the ECB sticks to its (increasingly toxic) negative rate policy. But we still see little value in core Govies. For choice we continue to overweight (OW) Credit, and to a lesser extent non-core. We like both the safety and relative valuation of EUR IG markets, and prefer Credit duration to Rates duration.
- Cash is no longer king; we further reduce our OW. We stay long equities, and positive on EM assets, despite the more crowded positioning on the latter.