Conviction themes for a ‘fat and flat’ market; equities to N over 12m
Sticking with ‘fat and flat’; downgrade equities to N for 12m
We downgrade equities to Neutral over 12 months on growth and valuation concerns. Until we see sustained earnings growth, equities do not look attractive, especially on a risk-adjusted basis. We expect particularly poor returns in dollar terms, with our forecast of a stronger dollar and the prospect of less negative equity/FX correlations.
Remain OW cash, but upgrade commodities to N over 3m
We remain Overweight cash on a 3-month basis, as we see potential for higher cross-asset volatility. Key risks include less China growth, a general pick-up of European political risk, a repricing of the Fed rate hike cycle, and
commodity price declines (in particular for metals). But we now expect less downside to oil over 3 months, given supply disruptions, and upgrade commodities to Neutral. Our key Overweight remains credit, where valuations and fundamentals appear supportive. We remain Underweight bonds and would hedge duration more actively, in particular in the US.
Conviction cross-asset themes in a trendless market
We highlight five conviction cross-asset themes for a volatile but trendless market: (1) prefer credit to equity, (2) focus on cross-asset carry opportunities, in particular EM, (3) position for pick-up in US inflation, which should drive rotation within equities, (4) oil to outperform metals and drive divergence in equities and credit, and (5) resurgence of divergence, with a focus on FX, which seems best positioned to benefit.