Cross-Asset Insights
Taking Stock, Adding Stocks
Our key messages in the wake of volatile price action are that BBB expansion remains intact even as more easing is on the way. We add to US equities now and keep carry exposure to HY, EM local rates. We like USD longs and shorting EUR rates vs. US and Japan.
- The Blindside: We had expected that the most likely near-term driver of volatility would be concerns that stronger US data would shift the Fed’s path. Instead, growth fears have returned in earnest, forcing us to reassess our views.
- Economics – Fight the Growth Scare: Having been below consensus on global growth, we think the market is now more bearish than we are. US growth is still on track for a strong second half; lower oil prices are a positive shock for EM and DM consumers; and central bank policy should remain accommodative, with no Fed hike until 2016.
- The Correction in Context: Measured by the moves in stocks, spreads, yields, and volatility, the current selloff is worse than median bull-market corrections since 1987 and has occurred in a shorter period too. Weakness has clearly been driven by growth fears, suggesting breakevens may be a key indicator for turning sentiment.
- Asset Allocation Changes: We add to US equities and close our underweight in EM credit. This follows the US HY and EM local additions last week. We cut our Bunds allocation further at current valuations, now a notch below US Treasuries.
- Best Ideas – What to Do Now: We summarize our best ideas, many of which are anchored on the premise that growth, while sub-par, is not rolling over.