Market research from Internaxx

Market research from Internaxx

This section is brought to you by the Luxembourg based online broker Internaxx. Market analysis is provided by Fortis Investments, the asset management arm of the Fortis group.

Strategy: Positive week leads to neutral on equities (source: Fortis Investments)
Equity markets have risen in the past week as the broad-based increase in producer sentiment and improved industrial production figures in Asia confirmed that the worst is behind us. A number of indices have broken through their 200-day moving averages, which often acts as a resistance level on the way up. We hit a stop loss on our underweight in equities and rebalanced to a neutral position despite our scepticism about how much further this rally may run.

Though the second US Q1 GDP growth estimate improved only slightly, the underlying data showed that domestic profits surged by 26.1% qoq annualised due to a doubling of profits at financials as write downs slowed. However, data also showed that companies had vigorously cut costs and that consumers are saving the government transfers and tax breaks instead of spending them.

In the eurozone, sentiment among retailers and producers improved but consumer confidence remained weak. The money supply showed that attempts by the ECB to reflate the economy have so far not been successful. Indeed, plans to buy EUR 60 billion of bonds this week—a tiny amount compared to eurozone GDP—are unlikely to make much difference. Though the risk of deflation in the eurozone exists, we are waiting for the final inflation data for more insight about headline and core inflation.
In Asia, Japan’s 5.2% mom increase in industrial production in April was spectacular and South Korea’s industrial production also showed an impressive rebound.

Investors’ risk appetite has clearly increased in recent weeks. Equities continued to rise and government bonds sold off. Emerging markets equities outperformed developed equities and high-yield corporate bonds fared better than investment-grade bonds. Cyclicals such as energy and materials outperformed healthcare and utilities. Though government bond yields continued to rise, corporate bond yields fell, resulting in a sharp narrowing of the risk spread. We do not think that government bond yields will rise much further as they may push up mortgage rates which could nip any stabilisation in the housing market in the bud.

We sold European inflation-linked bonds. We left our regional allocation unchanged. Our underweight in bonds is due to underweights in government bonds and European inflation-linked bonds. We are overweight investment-grade bonds and local-currency emerging markets bonds. Moreover, we are underweight real estate and overweight commodities.

Allocation: small caps moved to overweight (source: Fortis Investments)
Risky assets generally outperformed in May. Emerging markets (+16.7%) strongly outperformed developed equities (+8.6%). For both regions, this was the third consecutive month with positive performance. Commodities gained 13.8%, with crude oil prices up 32.3%. High-yield corporate bonds returned 9.1%, investment-grade 6.7%. The shift to risky assets hurt government bonds. US yields rose by 34 bps, eurozone yields by 41 bps.

We remained underweight in equities. Given our scepticism about the strength of the economic recovery, we think markets got ahead of themselves. (But as markets continued to rally, we hit our stop-loss level in early June and moved to a neutral stance). We overweight Europe and emerging markets relative to the US and Japan. The improved economic cycle should benefit emerging markets. Relative to large caps, we moved to an overweight position in small caps from a neutral stance. The economic cycle remains negative for small caps for now, but massive monetary and fiscal stimulus on the part of the authorities to foster an economic recovery should be positive. Small-cap valuations are also relatively attractive.

Issuance of investment-grade corporate bonds was strong in the first quarter. Yields fell as investor risk appetite improved. With the market returning to some normality, we still think the relatively high yields offer investors a good risk/return trade-off. Furthermore, large spreads make investment-grade attractive compared with government bonds. We have stuck to our large strategic overweight. We remain neutral on high-yield bonds. Investors could be too complacent towards high-yield. Many issuers are highly leveraged and debt refinancing could become a problem.

We consider emerging markets bonds attractive given the improved fundamentals –current accounts, debt ratios, foreign exchange reserves—and overweight the asset class. We are overweight in local currency emerging debt, expecting it to outperform foreign currency debt on the back of higher yields and scope for currency appreciation. We continue to prefer global convertible bonds to those from Europe where cash-rich companies do not need to issue convertibles. Overall, we are neutral on convertibles.

Real estate is attractively priced on average after the asset class (small underweight) was hit disproportionally by the financial crisis. However, deleveraging and the global recession remain negatives. Commodities (overweight) have started to anticipate a stabilising global economy. Also, low prices led to the postponement and cancellation of investment projects, which could lead to scarcity in the longer term. Our outlook for a lower dollar is another positive for the asset class.

Internaxx Top ten buys and sells –International Investors Activity summary from Internaxx

The 2008 Top Ten buys and sells are measured as the total number of trades carried out in each stock by Internaxx clients over the previous month. This report is not a recommendation to buy or sell these stocks.

Top 10 May 2009    

DISCLAIMER

This document has been prepared solely for informational purposes and does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any security or financial instrument, or any investment advice. Prospective investors should conduct such investigations as deemed necessary and should seek their own legal, accounting and tax advice to determine independently of the suitability and consequences of an investment.