Our Multi-Asset Portfolio Solutions (MAPS) team provide a monthly analysis of recent macroeconomic trends and give a framework for making asset allocation decisions.

Recent market trends

  • World equity markets climbed higher in October with the continuation of two themes from September: emerging market strength and the pricing in of further quantitative easing in the US. As the MSCI world ended up 2.9% for the month, 3.7% in US dollar terms, gains were less dramatic than September. Emerging markets continued their rise, supported by overseas and domestic inflows, gaining 3.3% on the month, with emerging Europe the standout gaining 4.8% thanks to strong returns from Russia, Turkey and Poland. Japan remains the weakest developed world economy falling 1.6% in local currency terms,although Yen strength cloaked a 2% rise in US dollar terms.
  • It was the cyclical sectors again which enjoyed most support from this positive market movement. Consumer discretionary, materials and energy all posted mid-single digit returns thanks to renewed confidence of a more robust demand outlook. IT also gained 5% reflecting a robust outlook for corporate spending and earnings. Financials were again weak as renewed fears over the mortgage market in the US and simmering sovereign debt issues in the Europe weighed on investors.
  • Volatility in equity markets has risen slightly from the lows of a month ago, but not significantly, and the VIX measure of option-implied US volatility is now in the low 20s, up from the high teens of a month ago but still well below recent highs of 35 at June-end. Implied volatility remains lower in Asian markets, indicating greater investor concern about Western prospects.
  • Government bond yields sold off slightly on the month as the debt markets priced in a degree of disappointment over the second round of quantitative easing and investors continued to favour equities. 10-year Treasury yields finished the month at 2.60%, selling off 10bps, Bunds sold off 25bps to 2.52% and Gilt yields ended the month at 3.19%. The treasury curve steepened, with the US 2yr-10yr spread above 200bps.
  • As the prospect of further quantitative easing neared the US dollar continued its slide, falling 2.3% on a trade weighted basis. Indeed, the Commodity Futures Trading Commission noted that dollar net short positions rose to $30.5 billion in the first week of October; this was the highest level since June 2008. US dollar weakness was particularly notable against the yen, which strengthened 3.7% - despite September’s efforts by the Bank of Japan to weaken it. The Australian and Canadian dollars enjoyed strong rises against the dollar thanks to robust industrials metals prices. The euro remained resilient, perhaps thanks to perceptions of a less expansive policy stance from the ECB.
  • Commodities enjoyed another strong month as West Texas Crude oil gained 4.6% on the month as it moved to the top of its range. Industrial metals enjoyed significant gains as zinc and lead rose over 8%. Gold maintained its stance as a beneficiary of QE expectations, finishing October up 3.5%.


Views

  • We believe that the Fed’s explicit citing of asset prices as a key channel for monetary policy, together with reasonable valuations and improving macro, justifies a more constructive approach to equities into 2011. Two further themes will continue to be supported in the coming quarters. First, Emerging Markets remain reasonable value versus developed markets given stronger structural characteristics. Capital inflow restrictions may introduce volatility but do not weaken the longer-term dynamics.
  • Second, low interest rates will remain a part of the landscape, driving more investors into the “search for yield” in corporate credit and High Yield markets. These remain attractive ways to benefit from solid corporate cashflows even if profit growth is only moderate.

Read the full article