Fortis Investments is looking for opportunities to go short in developed equities in the view that unwarranted optimism is being priced into the market.
Emiel Van Den Heiligenberg, the head of tactical asset allocation and balanced solutions, says previous market bottoms have lasted from three-and-a-half to 11 months.
This time, however, he expects the current downturn to last longer than average. The asset manager therefore remains cautious on equities: We shouldnt take risks in developed markets, and the summer months are not good for equity markets anyway.
He says market momentum is strong, green shoots are spreading, and that the worst stress for financials is over. However, he adds, this will not be a painless economic recovery. Economic surprises are peaking, valuations are back at fair value, technical indicators remain cautious, and profit expectations are too optimistic.
Christopher Jeffery, an economist on the tactical asset allocation team at Fortis, says the only source of growth has been emerging markets.
Emerging market fundamentals are slowly falling into place, he says. “Cyclical indicators have picked up with Chinese stimulus, and foreign exchange reserves have stabilised alongside trade and foreign direct investment flows.
America is recovering faster than anticipated, Jeffery says, while in Europe the picture is more muted.
Fortis’s in-house view is that emerging market equities look relatively attractive because of the Chinese effect, their valuations, and the strong position of the emerging world before the crisis. Van Den Heiligenberg says European valuations also look more favourable than those of other developed markets.
The tactical asset allocation team prefer corporate and emerging market bonds as they offer higher potential returns, and because a lot of bad news is already priced into valuations.
Elsewhere, there are overweight commodities, which they say should be boosted by the dollars weakness and the prospect of low prices setting the stage for a period of scarce natural overweight. Gold looks appealing in the current environment, as it is a real asset seen as a hedge against inflation, crisis and a weak dollar.