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21 May 2013
Flash: Do investment styles matter? - Societe Generale
FXstreet.com (Barcelona) - Kit Juckes, Global Head of Currency Strategy at Societe Generale asks, “Do investment styles smatter?”
He begins by noting that no sooner had he spotted that the US equity rally was being led by defensive stocks than the market has a make-over - as Paul Jackson observed last week. Until recently, he adds that equity investors favoured defensive, higher-yielding stocks, just as bond investors have done, amid a global cross-asset reach for yield. But now, cyclical stocks are taking the lead, while government bond yields and the dollar go on rising in tandem.
From a longer-term perspective, he writes, “I am tempted to ask ‘so what?’ US growth will settle at a somewhat higher pace, but the unemployment rate will only come down at snail’s pace, wage growth will be subdued and inflation (very) well-behaved. A bit of a re-pricing upwards for US yields and a somewhat stronger dollar shouldn’t be enough to de-rail global markets, surely!”
However, he recognises that markets live day to day and he can explain the combination of yield-hunting by both bond and equity investors, when yields are artificially low thanks to ZIRP and QE. But he wonders if there is there really enough growth for a cyclically-led risk rally from these levels in equities if bond yields go up much (any) further? More importantly, he sees that the flood of money into carry and inflation hedges is now flowing back the other way.
He finishes by adding, “The consensus view is, I think, that equities go sideways from here while bond yields go up a little and boredom sets in. That’s fine for a consensus and I haven’t got a huge argument against it. But a faster rise in yields, a deeper risk correction, more downside for EM equities and currencies and more dollar strength are all significant risks for June/July.”
He begins by noting that no sooner had he spotted that the US equity rally was being led by defensive stocks than the market has a make-over - as Paul Jackson observed last week. Until recently, he adds that equity investors favoured defensive, higher-yielding stocks, just as bond investors have done, amid a global cross-asset reach for yield. But now, cyclical stocks are taking the lead, while government bond yields and the dollar go on rising in tandem.
From a longer-term perspective, he writes, “I am tempted to ask ‘so what?’ US growth will settle at a somewhat higher pace, but the unemployment rate will only come down at snail’s pace, wage growth will be subdued and inflation (very) well-behaved. A bit of a re-pricing upwards for US yields and a somewhat stronger dollar shouldn’t be enough to de-rail global markets, surely!”
However, he recognises that markets live day to day and he can explain the combination of yield-hunting by both bond and equity investors, when yields are artificially low thanks to ZIRP and QE. But he wonders if there is there really enough growth for a cyclically-led risk rally from these levels in equities if bond yields go up much (any) further? More importantly, he sees that the flood of money into carry and inflation hedges is now flowing back the other way.
He finishes by adding, “The consensus view is, I think, that equities go sideways from here while bond yields go up a little and boredom sets in. That’s fine for a consensus and I haven’t got a huge argument against it. But a faster rise in yields, a deeper risk correction, more downside for EM equities and currencies and more dollar strength are all significant risks for June/July.”