Investment traffic lights

General Market Overview

A resounding start to the year. This is at least one thing most investors will agree on. Other than that, their assessment of developments in January will differ widely. Some shareholders are expected to have collected as much in January as they had hoped to gain over the entire year. Most bond holders, however, could have done without such a start. Commodity investors saw both winners and losers.

The dominating topics at the beginning of the year were the weak dollar, the rise in oil prices and especially the rapid increase in government-bond yields. The yield for 10-year Bunds, for example, climbed from 0.3% to 0.7% in six weeks, while the yield for 10-year U.S. Treasuries rose from 2.40% to 2.71% in January alone. It's up to the chart technicians to determine whether this means U.S. bonds can overcome important longer-term technical resistance or what yield level is needed to accomplish this. The nervous reactions also demonstrated that the biggest risk potential for markets lies in a surprisingly rapid increase in yields, and thus in inflation expectations beforehand. The final surge in government-bond yields towards the end of January is likely to have contributed to the stock markets losing some of their impressive gains made since the beginning of the year. However, with a plus of 5.7%, January was still enough for the S&P 500 and the MSCI AC World to record the best start to the year in over 30 years. The focus was primarily on cyclical sectors and regions - the Brazilian Bovespa went up by more than 15% in dollar terms in January.

At a sector level, financial and technology stocks were among the winners again. Stock markets were supported by positive earnings revisions, and in the United States these were primarily based on increasing interest rates, the higher oil price and positive effects from the tax reform. When adjusting the indices for currency effects, however, the lead of U.S. stock markets over the Eurozone and Japan shrinks once again.

Outlook and changes in positioning

We have only made one change in our tactical view on equities: Due to the improving environment especially in Brazil, we have upgraded Latin America to neutral. This means our positioning remains cyclical – from both a sector and regional perspective. When it comes to the technology sector, our decision was not an easy one due to the strong price increases experienced in the last few months, but our positive structural view still prevails. Another discussion point has been the fact that some of our 12-month price targets had already been reached following this strong start to the year. The S&P 500 stood out in particular, as the index exceeded our target by almost 3%. This is also due to the weaker dollar and higher oil price.

Our strategic focus remains on equities. From a tactical view, the strong start to the year and very optimistic sentiment indicators raised our concerns for short-term corrections, which eventually started to materialize at the end of January and the beginning of February. On the other hand, the statements made by companies make us very optimistic. Particularly German companies are going into the New Year with optimism and have reported growing revenues and margins. Our tactical view on German and European equities therefore remains positive, even more so after the correction.

In the bond segment, we have changed our view on U.S. and UK government bonds to neutral following the significant yield increases in the last few days. We have kept 10-year Bunds on negative and reduced 2-year and 30-year Bunds to negative as well. At the short end, we expect more upward pressure on yields because the European Central Bank's (ECB's) expansionary monetary policy is likely to be increasingly discussed in light of solid economic development in the Eurozone. In the corporate-bond sector, spreads have narrowed further, but due to the positive economic environment and, in Europe, due to continuous purchases by the ECB, we expect sustained demand in the investment-grade segment. In the United States, we remain positive for high yield due to the low default rates and despite the high valuations. However, we have reduced euro high yield to neutral due to the significant narrowing in spreads. For the dollar, we do not expect the weak momentum to continue and think a consolidation is more likely.

Equities*

		1 to 3 months	until December 2018
	Regions
	United States
	Europe
	Eurozone
	Germany
	Switzerland
	United Kingdom (UK)
	Emerging Markets
	Asia ex Japan
	Japan
	Latin America
	Sectors
	Consumer staples
	Healthcare
	Telecommunications
	Utilities
	Consumer discretionary
	Energy
	Financials
	Industrials
	Information technology
	Materials
	Real Estate
	Style
	Small and mid cap

Fixed Income*

		1 to 3 months	until December 2018
	Rates
	U.S. Treasuries (2-year)
	U.S. Treasuries (10-year)
	U.S. Treasuries (30-year)
	UK Gilts (10-year)
	Italy (10-year)1
	Spain (10-year)1
	German Bunds (2-year)
	German Bunds (10-year)
	German Bunds (30-year)
	Japanese government bonds (2-year)
	Japanese government bonds (10-year)
	Corporates
	U.S. investment grade
	U.S. high yield
	Euro investment grade1
	Euro high yield1
	Asia credit
	Emerging-market credit
	Securitized / specialties
	Covered bonds1
	U.S. municipal bonds
	U.S. mortgage-backed securities
	Currencies
	EUR vs. USD
	USD vs. JPY
	EUR vs. GBP
	GBP vs. USD
	USD vs. CNY
	Emerging markets
	Emerging-market sovereigns

Alternatives*

		1 to 3 months	until December 2018
	Infrastructure
	Commodities
	Real estate (listed)
	Real estate (non-listed) APAC
	Real estate (non-listed) Europe
	Real estate (non-listed) United States
	Hedge funds
	Private Equity2

Comments regarding our tactical and strategic view

Tactical view:

• The focus of our tactical view for fixed income is on trends in bond prices, not yields.

Strategic view:

• The focus of our strategic view for sovereign bonds is on yields, not trends in bond prices.

• For corporates and securitized/specialties bonds, the arrows depict the respective option-adjusted spread.

• For bonds not denominated in euros, the illustration depicts the spread in comparison with U.S. Treasuries. For bonds denominated in euros, the illustration depicts the spread in comparison with German Bunds.

• For emerging-market sovereign bonds, the illustration depicts the spread in comparison with U.S. Treasuries.

• Both spread and yield trends influence the bond value. Investors who aim to profit only from spread trends should hedge against changing interest rates.

Key

The tactical view (one to three months):

• Positive view

• Neutral view

• Negative view

The strategic view up to December 2018

Equity indices, exchange rates and alternative investments:

The arrows signal whether we expect to see an upward trend , a sideways trend or a downward trend .

The arrows’ colors illustrate the return opportunities for long-only investors.

• Positive return potential for long-only investors

• Limited return opportunity as well as downside risk

• Negative return potential for long-only investors

Fixed Income:

For sovereign bonds, denotes rising yields, unchanged yields and falling yields.For corporates, securitized/specialties and emerging-market bonds, the arrows depict the option-adjusted spread over U.S. Treasuries: depicts a rising spread, a sideways trend and a falling spread.

The arrows’ colors illustrate the return opportunities for long-only investors.

• Positive return potential for long-only investors

• Limited return opportunity as well as downside risk

• Negative return potential for long-only investors

Footnotes:

* as of 2/2/18

¹ Spread over German Bunds in basis points

² These traffic-light indicators are only meaningful for existing private-equity portfolios