Searching for new drivers Asset...- Extended dollar positioning is the key near-term risk...

Global Asset Allocation Strategy

April 2019

Investments │ Wealth Management

Searching for new drivers

This material was prepared by Investments |

Searching for new

drivers• We recommend to lift Europe to an overweight position. We think

investors are too pessimistic as we expect fundamentals to

stabilize, and the region is fairly priced.

• Japan is uninspiring on all counts, especially earnings, and we

lower Japan to underweight.

• Within equity sectors we move Industrials to underweight on the

back of weakness in the cycle, and lift Consumer Staples to

neutral. Hence we are moving to a more defensive stance.

EQUITY STRATEGY: Lift Europe

FIXED INCOME STRATEGY: Keep neutral

• The equity rally has tapered off in March, but global equities

have already delivered more than a yearly return YTD.

• At the same time downside risks for global growth has

increased, and it is too early to call a stabilization in the

deterioration in the earnings outlook.

• We still believe we will not see a recession this year, and that

decent growth together with relative valuation support equities.

On the other hand, trade war risks, a weak industrial cycle and

Brexit clearly creates a cloudy outlook. We keep our neutral

allocation while markets are searching for new drivers.

KEEP EQUITIES NEUTRAL

April 2019

• Government yields decreased considerably in March. We

recommend neutral allocation between the fixed income

segments.

• Overall, we still expect modest returns from bonds in 2019, as

spread and yield levels are low in a historic context.


Market performance & recommendations

Equity markets the big performer YTD, but taking a bit more cautious turn in March

Current allocation Previous allocation

ASSET ALLOCATION - N + Comments

Equities

Fixed Income

EQUITY REGIONS - N +

North America

Europe

Japan

Emerging Markets

Denmark

Finland

Norway

Sweden

EQUITY SECTORS - N +

Industrials

Cons Discretionary

Cons Staples

Health Care

Financials

IT

Comm. Services

Utilities

Energy

Materials

Real Estate

BOND SEGMENTS - N +

Government

Investment Grade

High Yield

Emerging Markets

Source: Thomson Reuters / Nordea


But the broad outlook remains reasonably solid

Risks to the growth outlook are increasing


Trade and manufacturing sending troubling signals


• The risks to the global economic outlook have increased. Although signs of stabilisation have emerged, the macro backdrop remains a key risk.

• Europe should sooner or later turn around by virtue of the current low activity in the manufacturing sector and an expected turnaround in autos.

• Troublingly, however, global trade volumes have declined as uncertainty over both the US-China situation and Brexit has lingered.

And the revisions seems to recover as well

Too early to call a stabilisation in earnings


On the face of it, it looks like the estimates for 2019 has levelled off


• While the bad start for earnings seems to have stabilized, we remain healthy sceptics. Down revisions of this size don’t happen without a reason.

• Q1 is already discounted to be a bad quarter, no news there, but the big question is Q2/Q3 given the string of less than good economic data YTD.

• This years gain will need support from the earnings side to be sustainable, and at the moment, we’re still waiting for that support.

Recently, markets have guided Fed’s expected rate path lower The end of Q/T might imply shrinking excess reserves

• The Fed catches up with markets and does not expect further rate hikes in 2019. Fixed income markets go further though, pricing in a full cut for 2020.

• Balance sheet contraction (Q/T) will end in Sept. as expected, but the balance sheet will be held constant afterwards, implying falling excess reserves.

• Markets’ assessment is thus hardly “goldilocks”: an end of the Fed hiking cycle is rarely positive for risk assets – shrinking excess reserves neither.

Fed’s dovish pivot: The end (market) or a pause (economists)?

Source: Thomson Reuters / Nordea Source: Thomson Reuters / Nordea

Brexit has so far not affected UK equities more than European onesBrexit or not? Here is where the reaction will most probably come

Brexit: no, no and no, but no hard Brexit please


• The indecision of the UK establishment is monumental. Theresa May’s deal has twice been voted down and presently, it looks dead in the water.

• At the same time, parliament has wrested control from the government to break the gridlock but so far hasn’t been able to reach any conclusion.

• The only consensus seems that no one wants a hard Brexit. However, it doesn’t help much when no other option seems to prevail. Wait and see applies.



Re-rating continues, and yields keep falling

Higher “valuation” also in the bond space; yields have cratered


Higher, but not high, valuation in the wake of the rally

• After the massive de-rating in 2018, valuation has bounced back on the rally and falling earnings estimates. In absolute terms, valuation has worsened.

• While not high, equity valuation is hardly attractive with the earnings uncertainty. How much re-rating can markets withstand given the earnings outlook?

• On the bond side, lower yields also means less absolute value. In relative terms however, there has been less of a change between equities and bonds.


Being bullish is in vouge againThe lows in volatility get higher, more to come?

Relapse in sentiment during the month, back at stretched levels


• Markets took a step back in the middle of the month, as did sentiment. However, the relapse was short and we’re back at early-March levels.

• We still think the optimism is partly misplaced; real money is not yet buying into rally and the bond market is clearly signaling anything but bullishness.

• Our base case still applies: during the rally all news (also bad) has been good news; should this change, sentiment is a risk at current levels.

Rate cuts and yield curve inversion reflect rising recession risksFalling rates decoupled from rising equities

A tale of two markets: Something has to give


• Equities are on track for the strongest 1st quarter start since 1998, closing in on last year’s all-time highs in various indices.

• But the end of the Fed cycle is currently priced and the 3M-10Y US yield curve inverted for the first time since 2007, implying end-cycle recession risks.

• Who’s right – equities (late cycle) or bonds (end-cycle)? If history is any guide, equity investors should watch out. Medium term, it pays to be prudent.

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US

D,

mil

lio

n

%

Amount of negative yielding bonds, globally

10Y German government bond yield

Signs of caution: Lower rated bonds lagging behind the recent rallyCore bonds: Hunt for capital preservation instead of hunt for yield

• As expected, the end of Fed Q/T has not really been an issue for duration: amount of negative-yielding bonds reached highest level since 2017 in March.

• Driver: Dovish central banks caused by rising end-cycle fears. Case in point, credit spreads were roughly sideways in March, reflecting cautious investors.

• Squaring richness in government bonds with elevated macro risks leads us to stay neutral government bonds, with a continued bias towards US duration.

Global yields: End-cycle fears causes race to the bottom

Source: Bloomberg/ Macrobond / Nordea Source: Thomson Reuters / Nordea


Earnings showing signs of stabilisation

Lift Europe to overweight and downgrade Japan to underweight


Good returns from all regions this year


• We recommend upgrading Europe to an overweight as investors have given up on the region while we expect fundamentals to start bottoming out.

• Japan, for its part, is uninspiring on all counts aside from valuation which is more attractive in Europe. Notably, recent money flows do not reflect this.

• The biggest risk to this view is protracted weakness in European manufacturing while the trade war and Brexit could impact both regions to some extent.


Raise Consumer Staples and lower Industrials

Go slightly defensive in the sector strategy

The industrial cycle under pressure


• We take a slightly more defensive stance in the sector strategy by lowering industrials to underweight and raising Consumer Staples to neutral weight.

• Despite the fact that yields have come down, there is still a case for Consumer Staples as the fundamentals looks better relative to other sectors.

• Industrials are lowered as a play on a further short term risk of weakness in the industrial cycle with also investment activity stagnating lately.

Sector Recommendation Relative weight

Industrials Underweight -2%

Consumer Discretionary Neutral -

Consumer Staples Neutral -

Health Care Overweight +2%

Financials Neutral -

IT Neutral -

Communication Services Neutral -

Utilities Neutral -

Energy Neutral -

Materials Neutral -

Real Estate Neutral -


April 2019

EQUITIESNEUTRAL

• We recommend upgrading Europe to an overweight as investors have

given up on the region while we expect fundamentals to start picking up.

• Japan, for its part, is uninspiring on all counts aside from valuation which is

more attractive in Europe. Notably, recent money flows do not reflect this.

• The biggest risk to this view is protracted weakness in European

manufacturing while the trade war and Brexit will impact both regions to an

extent.

OVERWEIGHT EUROPE, UNDERWEIGHT JAPAN

The long rally has been particularly strong in North America



Equity regions │ Returns (in SEK)

Total return 115% 97,8% 17,2%

Ann. Return 8,0% 7,1% 0,9%

SAA EXCESSTAA


Equity regions │ April 2019

USA Neutral

- Earnings outlook is deteriorating rapidly

- Valuation is the least attractive among

equity regions

- Extended dollar positioning is the key

near-term risk

Recommended weight 40%

Neutral weight 40%

Europe Overweight

- Too much political noise and economic

weakness already priced in, and valuation

is the most attractive among regions

- Monetary conditions remain supportive

- Economic and earnings outlook likely to

start picking up soon


Neutral weight 25%

Sweden Neutral

- Industrial sector facing some headwinds

from the slump outside the US

- Earnings still healthy, no signs (yet) of

trade-related issues

- Economy on a slowing path but level still

decent. Higher rates would be a negative


Neutral weight 15%

Japan Underweight

- Earnings outlook worse than elsewhere,

and support from the economy is elusive

- Valuation is attractive and monetary policy

supportive

- The link between yen and equity markets

means more muted return prospects


Neutral weight 5%

Emerging Markets Neutral

- Earnings outlook is weakening together

with the rest of the world

- Slower economic and trade growth are

concerning, but supporting policies from

China will help

- Valuation no longer a clear support


Neutral weight 15%

Asia excl. Japan


Eastern Europe


Latin America



USA │ Clouds gathering around the outlook

…and valuation is extended in comparison


US earnings outlook deteriorating rapidly…


• Last year’s support from strong earnings and economic growth is fading rapidly. A particular concern is the deterioration in the heavyweight sector, IT.

• Valuation remains stretched compared to peers, putting added pressure on the US in a wobbly market.

• Trade war will weigh on all equity regions, but the US is likely to lose the least if things deteriorate. Put together, we prefer a neutral weight.


Europe │ Raise to overweight – a contrarian buy on over-pessimism

Surprises are looking less negative compared to other regions


Positioning still seems stretched but less that earlier


• We recommend raising Europe to overweight based on over-pessimistic analysts and increasing risk-appetite (less political risk) in our models.

• Drivers: Prospects of a stabilization in leading indicators (even some seems to undershoot), stable earnings estimates will tempt investors.

• It goes without saying that we do not expect a “no-deal” Brexit which would meaningfully affect investors sentiment towards European assets.


Emerging Markets │ Weaker Chinese cycle will weigh on EM earnings

Brazilian equities are pricing in too much economic improvement


Chinese slowdown add pressure on already weakening EM exports


• EM earnings are highly correlated with EM exports. Both should come under increased pressure with the weakening Chinese import cycle.

• US-China trade deal remains an upside risk, but any sentiment boost should be short-lived. The global trade slowdown is not caused by the trade conflict.

• Driven by Bolsonaro optimism, Brazilian equities have made a classic overshoot relative to economic fundamentals. Don’t overstay your welcome.


Finland │ Good value and earnings mean great prospects

…and the usual valuation premium is goneFinnish earnings set to outpace peers…

• We keep the overweight in Finnish equities on the back of a good earnings outlook, great dividends and attractive relative valuations.

• Finnish stocks got more than their share in the Q4 sell-off, priming them for a rebound. However, some of this has already taken place.

• Although there is a risk that analysts have not fully appreciated the impact of the global slowdown, this risk is no more pronounced than in Europe.



Denmark│ Tactical outlook balanced, but more positive given the sector composition

Despite fluctuations the relationship holds up well


A stronger dollar tends to support Danish companies earnings


• Danish stocks have continued to catch up during March with defensives now again leading and earnings revisions favor DK stocks.

• Latest earnings season prospects seems marginally better than global earnings picture for DK stocks, but the overweight in industrials is a headwind.

• Valuation remains a headwind but given shifts in FX and the heavy weight of health care in the index is positive. We remain neutral with a positive tilt.


Norway │ Solid growth, but mixed outlook for oil

Norwegian equites are getting more expensive


Violent turn in oil prices, outlook is mixed


• Oil prices has been a tailwind so far this year, but the structural outlook is mixed, which means the support could easily turn again.

• The outlook for the Norwegian economy is solid and will support strong expected earnings growth, however a lot is already priced.

• We don’t expect support from weaker NOK, also due to the more hawkish central bank. In sum, a balanced outlook for Oslo Børs, we remain neutral.

Sweden │Industrial cycle still warrants some caution

Swedish equities lagging behind global


Industrials-heavy Sweden is dependent on the global momentum


• As previously flagged for, the EZ manufacturing slump and weaker Chinese data has weighed on the industrial cycle.

• The recent bounce in Swedish industrials appears premature given the worsening Chinese industrial cycle, stay neutral.

• The Swedish economy is doing well, but the housing sector remains a risk, and could continue to weigh on the large banking sector.

Japan │ Better value is to be had elsewhere, lower to underweight

Earnings are lagging the rest of the world


Clear underperformance in Japan, which we believe will continue


• We lower Japan to underweight on weaker relative potential. Simply put, Japan continues to be an uninspiring story from an investment perspective.

• The earnings outlook is dismal and estimates points towards negative earnings growth this year. Margins are also well below the other regions.

• Valuation is low but not a positive given the earnings picture, and foreign investors are leaving Japan. We think the money is better deployed elsewhere.

Sectors│ Returns (in SEK)

EXCESS

Industrials│ Industrial cycle remains under pressure

…but global manufacturing woes are not over


Trade hopes and risk-on sentiment buoy industrials…


• The risk-on sentiment, spurred by a dovish Fed and hopes of a trade deal have, has triggered a comeback for industrials.

• Our view is that the trade conflict has played a very limited role in the global slowdown, which is why we choose to fade the partly trade driven rally.

• As evident from recent Eurozone PMIs, global manufacturing woes are not over. Signs of acceleration in China also remain limited. UW industrials.

Consumer Discretionary │ Idiosyncratic factors distorts the tactical call

US consumer might experience some downside


Consumer Discretionary has done ok in 2018


• Consumer Discretionary is torn between the waning brick-and-mortar business and the booming online retail business, making the outlook hard to assess.

• The sector usually performs well in an early-cycle environment which was distorted by the US tax-reform in 2018 – but effects are waning.

• As the cycle matures the labour-intensive part of the sector will struggle while online retailers (e.g. Amazon) might perform.

Consumer Staples │ Short term upside from rates

Earnings growth for 2019 are close to the 2018 figures


Lower rates favors Consumer Staples


• The pressure from rates on bond proxies has eased, and the lower rates favors Consumer Staples, and fundamentals look more attractive.

• Structural long term challenges remain in the sector, where especially E-commerce is changing the landscape.

• Earnings have held up well compared the rest of the sectors. Margin pressure from freights costs have abated, although labor cost pressure persist.

Healthcare │ A good late cycle play

High drug prices has lead to pollical pressure


Healthcare typically performs well in late cycles


• Major M&A activity in the sector as a series of deals involving big pharma acquiring cheap biotech companies sparked off lately over the Christmas.

• Renewed focus from Trump on curbing prices, but so far the pressure is on the middlemen instead of big pharma.

• Fundamentals are still strong and Healthcare is typically a good late cycle sector.

Financials │ Cheap, but growth limits the upside

Weak ec. momentum and loan growth weights on European financials


Flat US curve compress interest rate margins


• Financials has underperformed the market YTD but are still very cheap versus history. The banking sector is split between US and EU banks.

• European banks struggle with several things, among this weaker macro momentum and political uncertainty.

• European risks and regulation are a headwind, while US deregulation provides a tailwind. Put together, we recommend neutral.

IT │ Earnings outlook is weak

Extremely strong earnings growth


Companies expect strong growth in investments


• IT has reclaimed lost ground in the recent rally, despite semi-cycle weakness and previous China cycle warnings from behemoths Apple and Samsung.

• The cyclical outlook has deteriorated, though both consumption, capex and the structural outlook (digitalization) supports the sector.

• Protectionism and trade war are obvious risks, and the risk/reward is no longer there for an overweight. We stick to a neutral weight.

Communications Services│ Estimated earnings are holding up

Biggest names in the new sector


Stocks moved from IT & Consumer Discretionary into Telecom


• Earnings estimates has fared much better for the communication sector than for the rest of the cyclicals, and that is a support.

• The new sector includes companies that facilitate “communication & offer related” content and information through media.

• Housing a majority of the FAANGs and their Chinese counterparts, the concentration of higher valued names poses a risk in a shakier environment.

Utilities │Stable earnings outlook

Better earnings outlook for Utilities


Less pressure from higher yields


• There is signs of overcapacity in the USA, which is not good for pricing power in the sector. We are also running at low levels of capacity utilization.

• Earnings revisions have turned positive, and the growth outlook for next year is improving.

• Utilities is highly levered and pay high dividends. If rates go higher it could hurt Utilities through higher costs, but this pressure has recently dropped.

Energy │ Risks are high

Booming US shale production


The falling oil price is taking its toll on earnings


• Positive output surprise, US waivers for Iranian oil importers and technical headwind led to a bear market in oil, but has rebounded 30% since the bottom.

• Structurally, the outlook is mixed due to the battle between the rise in shale production vs. underinvestment in traditional oil (depletion of traditional wells).

• Earnings estimates has been slashed, despite the recent uptick in oil prices, the risk is high and we stick to a neutral weight on the sector.

Materials │ Chinese cycle risk still weighs

Earnings tend to outperform towards the end of the cycle


The recent jump in industrial metals has lent support


• Materials tend to perform well towards the end of the cycle, but as the dominant player within most metals markets, China is a risk for the outlook.

• Despite recent rebound, China-worries continues to haunt the sector. Going forward, Chinese easing could provide a boost, but we wait for the evidence.

• Valuation is relatively attractive, but estimated earnings are being slashed, so we do not think valuation will be in the driver’s seat for now.

Tight labour markets supports earnings in the sectorTight relationship with rates

• The real estate sector has experienced strong performance since end of 2018 in the backdrop of the correction, risk off moves and importantly lower rates.

• Where as strong economic momentum in the US and tight labour makets support the sector the strong relationship with rates are expected to hold.

• Since we don’t see significant evidence for significant lower rates from here then the combination of strong fundamentals warrants a neutral position.

Real Estate │Strong fundamentals but limited upside from yield



• Government yields decreased considerably in March. We

recommend neutral allocation between the fixed income

segments.

• Moderating global growth has made central banks to turn towards

more cautious monetary policy, which has pushed yields lower.

Fed shelves rate hikes for 2019

April 2019

FIXED INCOMENEUTRAL

German 10-year yield touches negative again



Fixed income markets │ April 2019

Corporate bonds Neutral

- Decent economic growth and solid

balance sheets still support corporate

bonds and issuer credit metrics.

- Government yields have decreased and

central banks have shifted towards easier,

which means less headwind for corporate

bonds. We favour US bonds over

European ones.

- Returns from corporate bonds will remain

low, but they offer stability to the portfolio.

High-yield bonds Neutral

- High-yield bonds credit metrics are still

supported by good level of corporate

earnings and low financing costs. Default

rates are expected to higher later this

year, but the level is still low.

- Moderating growth and tighter financial

conditions could cause challenges for

high-yield a bit longer term. Currently,

however, moderate central banks provide

support also for high-yield bonds.

Government bonds Neutral

- Government bonds have shown good

returns this year, as more dovish central

banks have made the environment more

duration friendly.

- However, return prospect going forward is

modest due to already very low yield.

- Government bonds provide diversification

and stability to the overall portfolio

Emerging market bonds Neutral

- A dovish turn from the Fed and better FX

performance has been supportive for EM

bonds this year.

- However, with deteriorating global growth

momentum, it is challenging for EM bonds

to outperform.

- We estimate risks regarding EM bonds as

balanced, and we keep a neutral weight.

Cash Neutral

- Negative euribor rates mean that return is

still basically zero for cash

- Cash provides liquidity to the overall

portfolio and it also has an opportunistic

role if attractive investment opportunities

open up in the markets


EUR IG │ Continued low yields

Lower yields has helped performance greatly in 2019


Lower yields as government yields dive


• Slowing economic growth leaves limited upside pressure in government yields. Combined with healthy corporate balance sheets this limits investment risk.

• After widening considerably last year, corporate bond credit spreads have recovered this year due to a more dovish central banks.

• Return prospect from investment grade credits will remain low, as spreads are tight in a historic context. Corporate bonds offer stability for the portfolio.


US IG │Environment is more duration friendly

Currency-hedge eats most of the yield in US IG


Fed turning more dovish has increased appetite for duration


• Corporate credit fundamentals are still decent in the US. Economic growth is decelerating, but still relatively strong.

• Major central banks indicating a pause in monetary tightening supports IG performance prospects in general, although we expect returns to be low.

• We favour US investment grade credits over Eurozone, as the longer US duration appears attractive compared to European.


High-Yield │ Credit fundamentals still adequate

Forecasts point towards higher, but still modest default rates


Yield and spread have declined with a help of central banks


• High-yield credit spreads have tightened rapidly this year, after experiencing a spike in credit spreads in December due to tightening of financial conditions.

• Moderating global growth and tighter financial conditions weigh on high-yield outlook in the longer time horizon.

• High-yield issuer credit metrics are still adequate. Default estimates rose in February, but still point towards below historic ratios.


Growth environment is challenging for EM bondsValuation not as compelling anymore

• A dovish turn from the Fed and better FX performance has supported EM bonds further this year, after showing resilience through end of last year.

• But, global growth indicators are decelerating, positioning is getting more stretched, and valuation is not as compelling anymore.

• Easier financial conditions are supportive, but the growth environment is challenging for EM bonds to outperform. Keep neutral weight.

EM bonds │Positive momentum, but challenging environment



Nordea Global Asset Allocation Strategy Contributors

Strategists

Andreas Østerheden

Senior Strategist

[email protected]

Denmark

Sebastian Källman

Strategist

[email protected]

Sweden

Ville Korhonen

Fixed Income Strategist

[email protected]

Finland

Espen R. Werenskjold

Senior Strategist

[email protected]

Norway

Assistants

Victor Karlshoj Julegaard

Assistant/Student

[email protected]

Denmark

Mick Biehl

Assistant/Student

[email protected]

Denmark

Amelia Marie Asp

Assistant/Student

[email protected]

Denmark

Frederik Saul

Assistant/Student

[email protected]

Denmark

Global Investment Strategy

Committee (GISC)

Michael Livijn

Chief Investment Strategist

[email protected] Sweden

Antti Saari


[email protected]

Finland

Witold Bahrke


[email protected]

Denmark

Sigrid Wilter Slørstad

Chief Investment Strategist (acting)

[email protected]

Norway

mailto:[email protected]


DISCLAIMER

Nordea Investment Center gives advice to private customers and small and medium-sized companies in Nordea regarding investment strategy and concrete

generic investment proposals. The advice includes allocation of the customers’ assets as well as concrete investments in national, Nordic and international

equities and bonds and in similar securities. To provide the best possible advice we have gathered all our competences within analysis and strategy in one

unit - Nordea Investment Center (hereafter “IC”).

This publication or report originates from: Nordea Bank Abp, Nordea Bank Abp, filial i Sverige, Nordea Bank Abp, filial i Norge and Nordea Danmark, Filial af

Nordea Bank Abp, Finland (together the “Group Companies”), acting through their unit Nordea IC. Nordea units are supervised by the Finnish Financial

Supervisory Authority (Finanssivalvonta) and each Nordea unit’s national financial supervisory authority.

The publication or report is intended only to provide general and preliminary information to investors and shall not be construed as the sole basis for an

investment decision. This publication or report has been prepared by IC as general information for private use of investors to whom the publication or report

has been distributed, but it is not intended as a personal recommendation of particular financial instruments or strategies and thus it does not provide

individually tailored investment advice, and does not take into account your particular financial situation, existing holdings or liabilities, investment knowledge

and experience, investment objective and horizon or risk profile and preferences. The investor must particularly ensure the suitability of his/her investment as

regards his/her financial and fiscal situation and investment objectives. The investor bears all the risks of losses in connection with an investment.

Before acting on any information in this publication or report, it is recommendable to consult one’s financial advisor. The information contained in this report

does not constitute advice on the tax consequences of making any particular investment decision. Each investor shall make his/her own appraisal of the tax

and other financial advantages and disadvantages of his/her investment.


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Searching for new drivers Asset...- Extended dollar positioning is the key near-term risk...

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