Difficult to justify eurozone additions as market remains tricky


Andrew Wilson, head of investment at Towry, says it is still difficult to find reason to add eurozone assets.

Andrew Wilson, head of investment at Towry, says it is still difficult to find reason to add eurozone assets.

Asset allocation has become particularly tricky in 2013. Equity markets have been a rally in search of a correction, looking short-term overbought by mid-March, and vulnerable.

However, the prospect of taking some profits and rebalancing back into bond markets will not have been an enticing prospect for most portfolio managers.

US stocks enjoy record forecast forward earnings, and equities are not expensive considering they are four years into a bull market.

Indeed, emerging markets are positively cheap, having failed to participate in recent gains. They have had their worst start to a calendar year since 2008, and lagged behind their developed counterparts.

Part of this is down to the excellent performance of the US market, where share buybacks in 2012 were 50% higher than the average of the previous decade. The number of shares outstanding on the NYSE is falling rapidly, which creates a beneficial supply and demand effect, while corporate earnings have been more likely to surprise positively, too.

In contrast, it remains difficult to justify adding to eurozone assets.

The Italians have endured four recessions in ten years and are poorer than when they first joined the euro. There is no end in sight for the eurozone recession, the periphery has rapidly ageing populations and net emigrations. It is difficult to see how the EU will be able to continue to support 50% of the world’s social spending. Mario Draghi may well indeed need to do “whatever it takes”.

Counter-intuitively, there has never been less reward for holding government debt, despite there never having been more of it.

Nevertheless, there is not much high-quality collateral around. One wonders what assets might attract refugees from Cypriot bank accounts, which might support the argument that certain government bonds will retain ‘a bid’ for quite some time yet.

The rally will not have legs for much longer, unless corporates can start producing top-line growth to add to the perceived reduction in macro risks, but this seems unlikely.

Positive economic surprises may be harder to come by when we move into the summer months, which is a seasonally weak time of year anyway.

Skilful use of non-traditional asset classes can be important at such times, and when mainstream betas appear expensive, or at least due for a rest. Volatility, trend, and relative-value based strategies can all diversify, and are not dependent on a positive overall market direction.