Sadasdasd
April 2017
‘Wait and see’ best describes our mood this week. Our view on many asset classes hasn’t changed much from last
month; a lot of them are in a holding pattern. The Dutch elections last month delivered a convincing defeat for the rightwing populists, eliminating one potential source of market volatility, and in France, Marine Le Pen is falling behind in the
polls. Meanwhile, Washington, D.C. is presenting an all-too-familiar picture: a bitterly divided Republican party that has
just slammed the brakes on Trump’s healthcare plans. Now the market is waiting for clarity on tax reform.
On a tactical horizon, we continue to be overweight on equities, underweight on fixed income and neutral on
alternatives. We also still prefer spread products over government bonds within fixed income.
Summary
Within Fixed Income:
 We continue to underweight government bonds
because the economic performance in most developed
economies is improving. We think most sovereign bond
yields are too low, and on the margin central banks will
start tightening monetary policy.
 We continue to have a negative view of developedmarket government bonds.
 We are constructive on US investment-grade debt due
to the slower pace of issuance and the generally
positive investment and macroeconomic situation.
 Within high-yield debt, we are overweight on leveraged
loans.
 Our securitized position has gone from close to neutral
last month to slightly overweight this month.
Within Equities:
 We have a fairly positive view of equities due to the
supportive technicals and economic fundamentals.
 We like emerging market equities best in light of
positive fundamentals, sentiment and technicals.
 We have become more cautious about US equities
because valuations are stretched and technical price
factors are close to neutral.
Within Alternatives:
 We are neutral on listed real estate because the
potential for future rates hikes by the Fed
counterbalances our more positive general outlook on
equities.
 We are slightly underweight on oil versus ex-energy
commodities amid signs of rising US shale inventories
and lower-than-hoped-for production cuts by OPEC.
Figure 1: The table shows our asset class overweights and
underweights as of April 1 on a tactical three-month
horizon. Each percentage reflects the relative weighting of
the different asset classes within our model portfolio.
Source: Aegon Asset Management
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Fixed income - Government bonds
US: Preliminary GDP data show that US growth slowed in the fourth quarter on an annualized basis compared to the
third quarter. The difference can broadly be explained by the unusually high contribution of soybean exports to the third
quarter. (Trade data have meanwhile normalized.) The US headline unemployment rate stands at 4.7%, and in February
the headline Consumer Price Index reached 2.7% year on year. The Fed continued on its path of monetary tightening in
March, in line with market expectations.
For US rates, not much has changed from last month. The market continues to be range-bound. Treasury yields appear
to be in a holding pattern until there is more clarity about Trump’s pro-growth agenda. The market is pricing in three
hikes by the Fed this year and one in 2018. We continue to be above consensus for that timeline. As we remarked last
month, we think any fiscal stimulus package won’t get moving until 2018, which is longer than what the rest of the
market expects. Other pro-growth policies by the Trump administration, such as infrastructure spending, also have the
potential to get bogged down by the fist fights surrounding Obamacare and the debate that will inevitably arise on
border tax adjustments (BTA). All this leads us to believe that the FOMC won’t hike more than twice this year. There’s
room for a surprise, though: if Mr. Trump does manage to get Obamacare repealed and replaced, Republicans will have
more momentum going into tax reform, which would translate into higher rates.
That said, in our view it doesn’t make much difference if the Fed hikes twice or three times this year. The more
important components framing our view are the dollar’s strength and market stability.
Europe: Our view of European government debt has become a tad more negative since last month, mainly due to
technicals. The ultra-long term downtrend in yields is unbroken, and yields have been in a volatile uptrend since June
2016. The 50 basis-point resistance is under constant attack, and momentum is gaining traction.
As investors, we are pleased to see that Marine Le Pen’s chances in the forthcoming presidential elections in France are
waning and her gap with centrist Emmanuel Macron widening. Le Pen seems to be on a plateau, while Macron is on
upward trend. We are following the polls and spreads closely, as the outcome could affect the macro environment in
Europe.
Japan: Not much has changed with Japanese rates. We do tend to see some signs of inflation picking up, mainly due to
base effects, and there is a bit more speculation about what Bank of Japan will do. Its current policy remains very
accommodative. The 10-year yield control is expected to remain in place, which would put negative pressure on the
yen.
Fixed income - Investment grade
US: Like US government debt, US investment-grade has also hit a holding pattern. Investors have already worked
through the heaviest part of the supply calendar, so supply will slow, and we can expect positive technicals to begin to
reassert themselves. With the pace of supply slowing, we expect some tightening in the order of 5 to 10 basis points
over the next three months and an excess return of 75 basis points.
The macroeconomic environment continues to be supportive of US investment grade. New in March was the weakness
of oil, which makes us a bit more cautious as spreads in this asset class are highly correlated to the oil price. In
summary, however, investors seem to be comfortable with the current environment. We like the technical picture, but
it doesn’t pay to go down in quality. Inflows have been strong, to the tune of more than USD 2 billion a week.
Europe: Our view of European investment-grade debt hasn’t changed. The macroeconomic environment is improving,
though the micro side is deteriorating: Companies are building their capital position and banks continue to operate in a
tough environment with skimpy margins. The high volume of redemptions is positive for the asset class, but with yields
rising, spreads for this asset class keep grinding tighter and tighter. The significance for this asset class of the European
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Central Bank’s corporate sector purchase programme is clearly waning, even if we don’t yet know how tapering will
affect the programme.
Europe has a lot on its plate at the moment, and what surprises us is that the market is taking it all in stride. The market
seems to think the French presidential elections on April 23 (first round) are a done deal, but we’re not so sure — there
might be some last-minute volatility. On top of that, the Brexit divorce process has begun and the outcomes are fully
unclear. We think it’s unwise to assume investors can sail smoothly through all this. We are therefore closely following
developments on all sides.
Fixed income - High yield
US high yield: Here again, our opinion is the same as last month. Fundamentals are improving and there are fewer
defaults. President Trump’s policies will shape the fundamentals in this asset class, but for the time being things are
stable. Valuations are still at the tight end. There were significant outflows in the last two weeks of March, wiping out all
the inflows since November’s election. The dramatic outflows (though things have stabilized) were mainly in retail
exchange-traded funds by active managers. There is not much M&A or bridge activity going on at the moment, so the
forward calendar is likely to generate only limited net new supply.
European high yield: Yields are grinding tighter for European high yield, with an average of around 3%. We think
the market is complacent and that payback time could come in a few months. Otherwise, fundamentals for European
high yield are strong, but sentiment is slightly negative this month. The BB space is highly influenced by investmentgrade investors, and if the ECB retreats from this market, double BB buyers will run for the exit.
US leveraged loans: This month we see several key forces at play in this asset class: solid flows from retail, the
generation of CLOs, and a mixed quality of supply. The Fed’s recent hike of short-term rates caused LIBOR to rise,
creating more interest in cash from retail funds. Retail flows have been materially positive and are likely to continue as
long as the market expects the Fed to hike thrice this year. However, quality has been questionable lately due to
aggressive underwriting by retail funds that need to invest their cash. It’s hard to find good value, especially in the
secondary market.
Fixed income - Emerging market debt
We’re less enthusiastic about emerging market debt than we were last month. The drivers for emerging market fixed
income continue to shift away from immediate US policy concerns. Countries with solid fundamentals continue to
outperform. However, credits that are dependent on commodities or linked to China’s manufacturing supply chain will
suffer if global growth slows.
Valuations look unattractive. Sovereign spreads are slightly rich on a longer-term horizon. Emerging markets are
becoming a market driven more by technicals than by sentiment. Asset allocators are moving money into emerging
markets: emerging market fixed income funds recently attracted 17 billion euros — the highest volume since August.
Fixed income - Securitized
US securitized: A trio of low US unemployment, a healthy housing market (prepayments keep rising) and strong
underwriting standards continue to benefit US securitized debt. Sentiment is favorable, especially for short-dated assets.
But the shining light in this asset class is the technical picture: the overall supply/demand technical picture is very
positive and primary issuance has picked up. Net issuance for most sectors remains negative. The pent-up demand (both
reinvestment and outright) is driving the spread-tightening.
European securitized: All the lights are green in this asset class. The fundamentals are still favorable: GPD is
growing, business confidence is rising and inflation has reached its highest level in four years (near the ECB’s target).
House prices are rising everywhere, except in the UK. The search for yield continues in the ABS market.
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The primary supply for European securitized is non-vanilla, which is pushing spreads tighter in primary and secondary
markets. ECB funding is still cheaper for securitization from Europe’s periphery; therefore, hardly any issuance is
expected from there, with the exception of Italian non-performing loans (NPLs). The limited supply, coupled with the
fact that investors and dealers believe that bigger sizes are difficult to replace, is resulting in spreads reaching historical
lows for most sectors. The potential for volatility leading up to various European elections remains a side concern for
the asset class.
Equities
US: US equities haven’t moved much recently. Sentiment has come back to earth following the very high levels we saw
last month. All in all, everyone hopes nominal GDP growth will support corporate spending. The market is now pricing in
11-12% consensus EPS growth for this and next year (even without healthcare reform). We think that consensus view is
is fair and realistic. An acceleration in EPS would support valuations. Absolute valuation metrics continue to score on
the expensive side.
Europe: We see many positive signals for European equities. PMIs are high and improving, and there have been
positive earnings revisions for the coming 12 months. The investment clock is also supportive. European equities are still
dearer compared to its own history. On sentiment, we can see that the market does expect some volatility in April. The
biggest risk for the asset class is the elections in France and Germany.
UK: We are neutral on UK equities. Technicals are positive. The Bank of England’s 2017 GDP forecast has risen from
+1.4% to +2%, reflecting strong momentum and survey data. Forecasts are no longer too low. The probability of a hard
Brexit, which poses a risk to the asset class, has risen ever since the government outlined its approach to Article 50.
2017 is likely to be a strong year for EPS growth (+19% forecast). The P/E (21.8) is higher than the world average of 19.2.
The gap has increased, making UK equities relatively more expensive compared to last month.
Equities rest of world: Our view of Japanese equities is unchanged. A big problem is the aging of its population,
which will lower demand over time. And current underlying demand is simply not strong enough to generate
significantly positive structural economic growth. Encouraging is that the PMI exceeds 50 and is improving. Technically,
we see higher tops and higher bottoms for Japanese equities, which is supportive.
In China, most economic data point to a slower pace of growth: real GDP growth slowed to 6.7% in 2016 from 6.9% the
year before. A lot of bad loans are coming to the surface due to China’s adjustment to a lower growth pace.
Fundamentals have improved slightly and earnings revisions have been very high at +24%. Earnings themselves are still
negative, but at a less negative pace. As to sentiment, we are a bit more concerned than we were last month, because
the central bank had to inject money into the banking system. The Chinese volatility index remained at a historically low
level.
Emerging markets: Within equities, emerging market equities are our favorite asset class this month. Fundamentals
are positive and valuation is neutral. Emerging markets equities are trading at multiples that by some measures
correspond to historical averages. The asset class seems to be outperforming developed market equities. The PMI is still
improving on a trend-like basis: the level and speed of the PMI’s improvement is behind developed markets, but is still
positive.
Global trade is clearly on the rise are trade balances are stabilizing. The stabilization of China’s imports points to lower
stress regarding mainland China growth. Mr. Xi’s mid-term party congress last fall suggests that the government wants
to maintain the status quo and manage risks as they emerge, rather than providing a solution of some sort to the
imbalances.
Inflation is rising and inflation surprises are positive, but the overall growth of consumer prices is still muted. In terms of
sentiment, the flows are clearly pro-risk and positive into emerging market equities. The valuation discount to
developed markets is close to 15-year lows due to high valuations for developed-market equities.
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Alternatives
REITs: Overall, fundamentals improved slightly last month, but valuations deteriorated. Normally US REITs trade at a
premium; now they can be had for a discount. The dividend yield for real estate is still attractive compared to credit
spreads in Europe and Japan. The REIT sector remains vulnerable to rate movements. Slightly higher rates are expected
for the US, and we think it will happen in the rest of the world too. That would negatively impact REITs.
Distressed credit: We are a bit more negative about this asset class than we were last month. Our view of valuation
has dropped because of the lower quality of bonds we have seen in recent weeks. The oil price also fell, and energy is a
large part of the index. Commodities have also weakened recently. Flows are still positive year to date, but have turned
negative in recent weeks. Despite the recent sell-off, CCC yields are still below historical averages on an absolute basis,
but modestly wide of historical spreads for BB/Bs.
Looking ahead, higher interest rates may pressure businesses with refinancing needs and/or interest-rate-sensitive
sectors. The market has been soft in recent weeks, but issuers still have the ability to opportunistically term out
maturities and reduce their cost of financing. A lot of cash is sitting on the side-lines, but investors are only marginally
interested in distressed debt strategies.
Commodities – oil: Our opinion of fundamentals, technicals, sentiment and valuations have all turned negative this
month. Inventories, measured by days of supply, have been building up higher than normal patterns would suggest. The
OPEC’s production cut is another negative driver. The oil price reacted very negatively to the news that Saudi Arabia
unexpectedly increased oil production more than it had promised. The market is increasing its long position, which is
negative for oil prices.
In terms of valuation, the trade-weighted dollar appreciated slightly in the last two months, and the latest OPEC
agreement pushed oil prices above USD 50. This increased the gap between both, which could put some downward
pressure on the oil price.
Commodities - ex-energy: The global economy remains strong and the cyclical picture is improving. Inventory
levels are at average levels, with the exception of wheat where inventories are elevated. In terms of valuation, we have
upped our opinion to neutral, from negative last month. Regarding sentiment, analyst readings are bullish on copper,
corn and sugar, and there is no real stress coming from other sources.
About the House View
Aegon Asset Management operates from centers of expertise in North America, the UK, Continental Europe and Asia. The Aegon
Asset Management House View is updated on a monthly basis, and is an excellent example of how we leverage our international
expertise. First, we collate a global set of asset class views from our international teams. The asset class views are subsequently
reviewed from macro, rates and asset allocation angles and an overarching committee then establishes the global House View. The
outcome of this disciplined global process provides portfolio managers with latitude while at the same time ensuring that our
products and solutions remain aligned.
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Disclaimer
The content of this document is for information purposes only and should not be considered as a commercial offer, business proposal
or recommendation to perform investments in securities, funds or other products. All prices, market indications or financial data are
for illustration purposes only. Although this information is composed with great care and although we always strive to ensure accuracy,
completeness and correctness of the information, imperfections due to human errors may occur. Therefore, no rights may be derived
from the provided data and calculations.
Aegon Investment Management B.V. is registered with the Netherlands Authority for the Financial Markets as a licensed fund
management company in the Netherlands. Kames Capital plc (Company No. SC113505) is registered in Scotland at Kames House, 3
Lochside Crescent, Edinburgh EH12 9SA. Kames Capital plc is authorised and regulated by the Financial Conduct Authority.
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