One of the most worrying aspects of today’s investment backdrop is the lack of dissent among market participants. The consensus is the most consensual it has been for many years.
A typical multi-asset portfolio today will very likely look something like this (with reasons in brackets): equity overweights in Europe (quantitative easing), Japan (QE) and Asia (valuations, decent growth); underweights in US (valuations, no QE, rate rises) and emerging markets (US dollar strength, decelerating growth); minimal duration (rates cannot go any lower), overweight high yield (the only place you can get yield in fixed income) and property (decent yield and solid outlook); no commodities (China slowdown, US dollar strength); long US dollar (US Federal Reserve to hike first); short Japanese Yen (QE) and euro (QE).
Even on a sector level the consensus is pretty strong: overweight technology (earnings growth) and consumer discretionary (oil ‘tax cut’), underweight energy (oil price) and materials (China slowdown).
You do not have to look at positioning surveys to know this; it is self-evident from price action and the financial media. Everyone is positioned the same way.
This of course is a concern because when sentiment eventually turns the outcome is usually much worse.
However, it is hard to argue against the logic of any or all of these trades. The key for some time now has been to act early and decisively, and to be active in asset allocation. Riding your winners has worked, but I think it is prudent to keep recycling your profits into the areas of the market where sentiment has got too bearish.
QE by the ECB has been the biggest market driver this year by far. Italian equities were up 22 per cent in the first quarter. You have to lend money to the German government for more than nine years to get a positive yield. It turns out that a 10-year bund with a yield of 54 basis points at the beginning of the year was good value.
The outperformance of European equities is no surprise, as QE has unfailingly lifted asset prices wherever it has been implemented on a major scale. The concurrent drop in the euro has been a material boost for any company with euro costs and US dollar revenues. Earnings in Europe are expected to be materially better in 2015 than in the US, partly driven by the currency moves. But what led some to go overweight Europe in Q4 of 2015 were signs of economic improvement, not just a hunch that QE would finally happen.
The Citi Surprise index for the eurozone bottomed early in 2014 when economists were at their most bearish and then actually turned positive in December. Meanwhile there was data showing credit creation was picking up momentum, just as eurozone banks got through the Asset Quality Review stress tests carried out by the ECB. Moreover, 2014 saw the last of any drags from austerity measures; the handbrake was finally released on the eurozone’s 15-year old, accident-prone party bus.
