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Living with de-leveraging
Key Investment Themes for 2009
Favour corporate bonds over both government bonds and equities. For investors who wish to
benefit from lower yields but also want to ease back into riskier assets, high-grade corporate bonds look attractively priced, after the forced sales of recent months.Though a major narrowing of spreads seems unlikely in a recession, the yields on some corporate bonds with strong cash flows merit serious attention.
Be long government bond duration. Yields don’t appear to have
bottomed yet.That’s because of the unusual depth of this recession relative
to others since 1945, deflationary pressures, and the possibility that central banks will buy government bonds once conventional
forms of monetary policy have been exhausted.
Equity weakness in 2009 should be used as a chance to add to
equity exposure. Amid continued poor earnings and macro data, equities are set to stay volatile and could retest their lows.The flipside of this near-term uncertainty is attractive valuations that could vanish early in a fundamental equity rally.
Investors focused on capital preservation should wait for evidence that the environment for risk assets has picked up. Those who are unwilling or unable to accept volatility may wish to wait for signs that the macro-economic environment is improving.
Within equities, favour large-cap developed markets. Even in a standard economic cycle, it would be too early to expect high-beta trades such as emerging markets, high-yield corporate bonds and small caps to outperform. One in which de-leveraging is a defining feature is likely to be particularly tough for small caps.
Creditworthiness should be a key driver of relative returns from equity markets. With global recession conditions persisting in 2009 and deleveraging a major force, the currencies, capital markets and economies of countries where external financing needs are set to rise are likely to remain under pressure.
Commodities are likely to perform poorly, as their recent bubble continues to deflate. Bricks and mortar commercial property is likely to come under further pressure, and REITs, despite looking good value, are set to suffer from continued de-leveraging, limiting their upside.
Market Perspective
The information you need to keep up-to-date with the latest developments within
the global financial markets.
