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Global Asset Allocation Strategy

February 2020

Investments │ Wealth Management

Enjoy the (bumpy) ride

Enjoy the

(bumpy) ride• We recommend a neutral stance across regions as risks have

turned increasingly two-sided. Political and lingering macro

concerns weigh on Europe, Japan and EM, while high valuations

and the increasing IT concentration is a growing risk in the US.

• We continue with a balanced cyclical stance in the sector

strategy, with overweights in Energy and Healthcare, and

underweights in Utilities and IT.

EQUITY STRATEGY: selective bets within sectors

FIXED INCOME STRATEGY: keep the EM overweight

• We think equities have a good chance of outperforming bonds

and therefore stick to our overweight. However, given the high-

strung market, the likelihood of a setback has increased and one

is already underway. Without lasting effects on fundamentals,

however, we consider such pullbacks as buying opportunities.

• A slowly improving cyclical outlook and stronger earnings growth

will underpin the stock market performance. Historically low

yields will also continue to support both the market and the

economy, although they are unlikely to veer much lower.

ODDS STILL FAVOUR TAKING RISK

February 2020

• Generally, risk-taking is needed if any return is to be had in this

space, where most government yields are very low or even

negative. Riskier credits yield more, and among them we prefer

EM debt. OW EM Debt, UW government bonds.

• We expect modest returns from fixed income during 2020 as

yields are low and probably will not head much lower.

Market performance & recommendations

All assets have had a good run, but equities stand out

Current allocation Previous allocation

ASSET ALLOCATION - N + Comments

Equities

Fixed Income

EQUITY REGIONS - N +

North America

Europe

Japan

Emerging Markets

Denmark

Finland

Norway

Sweden

EQUITY SECTORS - N +

Industrials

Cons Discretionary

Cons Staples

Health Care

Financials

IT

Comm. Services

Utilities

Energy

Materials

Real Estate

BOND SEGMENTS - N +

Government

Investment Grade

High Yield

Emerging MarketsSource: Refinitiv Datastream / Nordea

3

Global growth is stabilizing / improving

Source: OECD / Nordea

Manufacturing is improving and services is holding up.

Source: Refinitiv Datastream / Nordea

• The global manufacturing sector has stabilized and seems to be picking up, while the service sector PMIs are still at levels consistent with decent growth.

• While there are still more OECD-countries expected to decrease rather than increase GDP growth in 2020, the outlook is improving.

• We expect a moderate growth pick-up supported by loose financial conditions and healthy household finances, but held back by geopolitical uncertainties.

0

5

10

15

20

25

30

35

40

45

50

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Accelerating growth Decelerating growth Negative growth

Number of countries

4

OECD expects more countries to increase GDP-growth

US growth is supported by healthy household finances


US unemployment rate is at a multi-decade low and wages are rising


• The US unemployment rate is the lowest since the 1960s. Unemployment rates in Germany, UK, Japan are also at multi-decade lows.

• Wages have risen, but consumers have been cautions, and have increased savings and reduced debt burdens.

• Rates are likely to stay low at least in the short term, leaving consumers resilient and with spending power.

5

US households have increased savings and reduced debt

The coronavirus could weigh on the Chinese economy short-termShipping rates raise some questions regarding the Chinese recovery

The Chinese recovery could disappoint, especially given the coronavirus outbreak

Source: Refinitiv Datastream / Nordea Source: Refinitiv Datastream / Nordea

• Chinese macro improved late-2019, but recent trends in “China plays” such as industrial metals and shipping rates suggest a more muted 2020 outlook.

• Chinese money and credit trends have not matched previous stimulus periods, which also points to a more tepid recovery in this cycle.

• The coronavirus adds additional (hopefully short-term) pressure on the Chinese economy, and will weigh on the now very large service part of the economy.

6

Global liquidity still supports marketsGlobally, company funding costs are at all time lows

• Despite seemingly tight labor markets, there is limited wage and inflation pressure, allowing central banks to leave monetary policy very accommodative.

• Corporate debt service costs have fallen to all time lows as both government yields and credit spreads have fallen. Households debt service costs are also low.

• In addition, the major central banks are still supporting markets by printing money to buy financial assets. In sum, this implies very supportive financial conditions.


Central banks: Easy policy continues with no rate hikes in sight

7

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Q1 Q2 Q3 Q4

Earnings growth,USA (S&P 500) forecast

Out of the earnings recession?

Earnings could be turning to growth in the US already…


• Earnings growth may be stabilising already, as Q4 reports are arriving. If the normal pattern holds, growth in the US will end the quarter in the black.

• There are still numerous risks, but if leading indicators keep improving, we will get closer to a normal 5-8 % year for earnings growth.

• This is likely to have been the least impressive earnings recession in recent memory, partly helped by central banks.

…and global earnings estimates are stabilising


8

0%

But the risk premium is still very attractiveValuations look very extended compared to post-IT crisis history

Equities look expensive if we only look at one side of the equation


• Most stand-alone indicators for equities look very extended and are closing in on post-IT bubble highs.

• However, relative to bonds most equity regions still seem very attractive and will stay so without a major contraction in earnings and/or increase in yields.

• Moreover, when the economy improves, equity risk premia tend to get squeezed via higher yields or higher P/Es further improving the trade-off.

*Earnings yield on global stocks less 10Y inflation-adjusted US Treasury yield

9

Not all investors have bought in to the rally Low cross asset volatility increases risks

• Strong price momentum combined with low volatility across asset classes means that systematic trading strategies have added risk and look stretched.

• Stretched positioning increases risks of a setback. Discretionary investors have on the other hand become more optimistic and have room to add risk.

• With current muddling through macro backdrop and easy central banks we think that the TINA-effect can continue to push investors into equities.


Sentiment appears stretched but not everyone is on board

10

Corrections and setbacks are normalRisks of a larger corrections seems low

• Current backdrop limits the risk of a larger correction since discretionary investors still have room to add risk.

• Though we see a large risk of e.g. a 4-6% pullback we do not expect a larger correction >10-15%. The coronavirus does however add downside risk.

• During the past 10 years corrections have been the normal where e.g. growth worries and/or technical factors have caused the correction.


Elevated risks of a set back in risky assets

-

10

20

30

40

50

60

70

80

90

100

1990 1998 2000 2007 2011 2015 Q4 2018 Today

Other Liquidity Valuation Earnings Macro

11

Bear market indicator, index

Politics will still dictate market development short term

The trade conflict Brexit

• The strategic conflict will not disappear

during 2020, if even during Trump’s

presidency. The “Phase 1”-deal has

been signed but most tariffs are still in

place and uncertainty around

enforcement still persists.

• It is positive that tariffs are now being

removed rather than increased. We have

a positive bias given 2020 election year

and weaker economic growth.

• UK and EU are now ready to start

negotiations around the actual deal. The

deadline for the actual deal (end 2020)

needs to be extended by July 1st and

BoJo has clearly communicated that is

not going to happen. A simple deal

seems like the most likely.

• The Brexit risk will continue and there is

an increased risk of a “no-deal” by

accident.

2020 Presidential Election Hong Kong Protests European Political Risks Middle East Civil Unrest

• Europe will, with all

likelihood, continue to

be impacted by political

risks.

• Hong Kong/EM protests

is a risk, especially if an

economic stabilisation

don’t materialise.

• Chile protests (Transport

fares), Catalonia

Independence protests,

France (Yellow Vests), etc.

• Will Trump be re-elected?

Or impeached? The biggest

political event in 2020 will

create a lot of headlines.

• Middle East tensions are

(almost always) a risk to the

oil price

Source: iStock / Pearson Institute 12

Polls suggest Bernie Sanders as a candidate Predicting both outcome and market reaction can be difficult..

US elections a significant theme for markets in 2020

Source: Refinitiv Datastream / NordeaSource: PreditIT / Nordea

The S&P rose

following events that

indicated Trump was

less likely to win the

election

The S&P fell following events

that indicated Trump was

more likely to win the

election

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Firstpresidential

debate

Trumprecording and

SecondPresidential

Debate

FBI reopensits

investigationinto Hillary

Clinton

FBI closes itsreopened

investigationinto Hillary

clinton 2016

Election night:Until midnight

Election night:After midnight

Change in prediction of Trump winning election S&P return

13

0

0,1

0,2

0,3

0,4

0,5

0,6

15-07-2019 14-08-2019 13-09-2019 13-10-2019 12-11-2019 12-12-2019 11-01-2020

Elizabeth Warren Joe Biden

Bernie Sanders Donald Trump

Andrew Yang Michael Bloomberg

North America is expensive, but this did not prevent last year’s rally

Neutral across equity regions


Strong returns in all regions


• We find the regional game hard at this juncture. Many regions have significant up- and downside risks. Hence, we prefer to take our bets elsewhere.

• Normally, one would look to Europe, EM or Japan in a cyclically improving environment, but there both political and macro risks linger.

• There are a lot of risks that could tip the scales either way, e.g. Brexit, trade war, Hong Kong protests, and the recent corona virus outbreak.

14

Credit spreads are tight on historic terms in many segmentsMore attractive yields found only in risky bonds

• There has been strong demand for bonds and spreads have tightened. Spreads on highly rated corporate bonds are tight relative to history.

• The current, slowly improving cyclical environment will keep major DM central banks on hold and thus yields from falling much further.

• EM central banks, on the other hand, have room for further monetary easing. We keep our overweight in emerging market hard currency bonds.

Credits | Performance helped by spread tightening

Source: Refinitiv/ Nordea Source: Refinitiv/ Nordea

15

96%

97%

89%

87%

97%

87%

38%

86%

51%

0% 20% 40% 60% 80% 100%

EUR IG

US IG

Global HY

US HY

US HY BB

US HY B

US HYCCC

EUR HY

EMD $

share of time spreads have been wider during the past 10 years

Nordea Global Asset Allocation Strategy Contributors

Strategists

Sebastian Källman

Strategist

[email protected]

Sweden

Ville Korhonen

Fixed Income Strategist

[email protected]

Finland

Espen R. Werenskjold

Senior Strategist

[email protected]

Norway

Hertta Alava

Senior Strategist

[email protected]

Finland

Assistants

Mick Biehl

Assistant/Student

[email protected]

Denmark

Amelia Marie Asp

Assistant/Student

[email protected]

Denmark

Global Investment Strategy

Committee (GISC)

Antti Saari

Chief Investment Strategist

[email protected]

Finland

Johan Larsson

Chief Investment Strategist

[email protected]

Sweden

Kjetil Høyland

Chief Investments Strategist

[email protected]

Norway

Erik Bruce

Chief Investments Strategist

[email protected]

Norway

Andreas Østerheden

Senior Strategist (GISC Driver)

[email protected]

Denmark

mailto:[email protected]

Ansvarsreservation

DISCLAIMER

Nordea Investment Center gives advice to private customers and small and medium-sized companies in Nordea regarding investment strategy and concrete

generic investment proposals. The advice includes allocation of the customers’ assets as well as concrete investments in national, Nordic and international

equities and bonds and in similar securities. To provide the best possible advice we have gathered all our competences within analysis and strategy in one

unit - Nordea Investment Center (hereafter “IC”).

This publication or report originates from: Nordea Bank Abp, Nordea Bank Abp, filial i Sverige, Nordea Bank Abp, filial i Norge and Nordea Danmark, Filial af

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Supervisory Authority (Finanssivalvonta) and each Nordea unit’s national financial supervisory authority.

The publication or report is intended only to provide general and preliminary information to investors and shall not be construed as the sole basis for an

investment decision. This publication or report has been prepared by IC as general information for private use of investors to whom the publication or report

has been distributed, but it is not intended as a personal recommendation of particular financial instruments or strategies and thus it does not provide

individually tailored investment advice, and does not take into account your particular financial situation, existing holdings or liabilities, investment knowledge

and experience, investment objective and horizon or risk profile and preferences. The investor must particularly ensure the suitability of his/her investment as

regards his/her financial and fiscal situation and investment objectives. The investor bears all the risks of losses in connection with an investment.

Before acting on any information in this publication or report, it is recommendable to consult one’s financial advisor. The information contained in this report

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and other financial advantages and disadvantages of his/her investment.

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