Global

Semiconductor stocks finished last year on a strong note, supported by a surge in M&A and hopes that low oil prices would spur an increase in consumer spending, particularly on electronics. While the latter has improved, the M&A backdrop is becoming more hostile as the cost and access to capital become more restrictive. We put this group on our high-conviction underweight list to reflect our concern that once M&A euphoria faded, a renewed focus on fundamental profit drivers would trigger a de-rating. Apart from better spending on electronics, the data continues to support our bearish call. Global semi sales are shrinking, with key producing countries like Korea and Taiwan suffering from a steep export contraction. That implies heightened liquidation pressures, which will undermine profit margins. Worse, semiconductor companies have been slow to downsize despite threats to top-line growth, adding to profit margin pressures, please see the next Insight. The ticker symbols for the stocks in this index are: INTC, TXN, AVGO, MU, ADI, SWKS, LLTC, XLNX, NVDA, MCHP, QRVO, FSLR.

Reduce portfolio duration to neutral, while also cutting exposure to European bonds (both in the core and Periphery) and Canadian government bonds.

Plunging commodities have been driven by increased supply and falling investor demand, not a major downshift in physical demand. Stay neutral global equities. The earnings outlook remains uninspiring, but bottoming oil prices and continued monetary stimulus support valuations. The selloff in global bank shares reflects NIRP-related "income statement worries", not "balance sheet concerns" linked to deteriorating credit quality. Downgrade Treasury notes to neutral. The rally in bonds has brought 10-year yields near our long-standing, out-of-consensus target of 1.5%. 

Special Report

Rebalancing in the oil market later this year will arrest the negative feed-back loop driving markets' inflation, interest-rate and FX expectations, particularly for non-OPEC oil-exporting countries.

Maintain an above-benchmark portfolio duration since, favoring markets with the highest real yields that stand out in a world where 65% of Developed Market government bonds trade with a negative yield.

It is highly unusual for equities to enter a bear market without the economy going into recession. Since we see the risk of recession as low, we recommend a neutral allocation between bonds and equities.

Last month, the model outperformed both global and U.S. equities in local-currency and U.S.-dollar terms. For February, the model is aggressively increasing its risk exposure and has included a bet on commodities for the first time since 2012. For equities, the largest overweight remains Europe, but EM and Canada enjoyed significant upgrades. For bonds, the model favors the European periphery.

Special Report

While cyclical factors have contributed to the recent trade slowdown, there are many longer-term structural forces that will pose headwinds to globalization. A lack of aggregate demand will constrain growth and hurt trade in a global economy attempting to increase savings. Meanwhile, the bulk of economic dividends from free trade have already been reaped. The direct casualties from slowing global trade are economies with large export sectors: most commodity-producing countries and some south-east Asian nations.

Special Report

We are introducing a quantitative equity country allocation for the MSCI World universe. Currently the model recommends overweight U.S. and eurozone while underweight Japan, U.K., Canada and Australia, broadly in line with our judgement except that we are more bullish on Japan than the model.

The U.S. corporate re-leveraging cycle is far more advanced than is widely believed. Corporate health looks only mildly better excluding the troubled energy and materials sectors. Mushrooming leverage ratios are not restricted to junk issuers either.