However, equity sentiment is riding high for now. While valuations may not be attractive in absolute terms, equities still look a much better buy than bonds. Blackrock for example now has a positive outlook for all equity asset classes bar US stocks, and Expert Investor asset allocation sentiment data point in a similar direction.
Bi-polar sentiment
The ETF-based quantitative strategy ’rotatiebeleggen’ (rotation investing), run by the Dutch private bank Wijs & Van Oostveen, perfectly captures this bi-polar sentiment. ”In our offensive strategy, we are currently taking the maximum risk, with a two-thirds allocation to EM equities and one third to the MSCI World,” explains the bank’s chief investment officer Robert Schuckink-Kool.
”But in our defensive mandate, we have been completely out of equities for two weeks now, and have an allocation of 25% to gold.” It’s indeed interesting that this years equity rally (the MSCI World is up 5% year-to-date) has coincided with an even greater rise of the gold price, which is a typical risk-off asset.
Tanja Wennonen-Kärnä, senior portfolio manager at Finland’s Evli Bank, is also hinging on two thoughts, which has stopped her from making any big asset allocation calls this year. “We haven’t really changed anything in our asset allocation this year, and have no strong under- or overweights,” she says.
In his active allocation, Schuckink-Kool takes less bold bets than his quantitative model, which is based on a range of macroeconomic indicators, prescribes. ”We sold some of our US equity holdings in February and are now slightly underweight risk assets. Valuations are now too high to take above average risk,” he says. ”We have noticed a sort of eagerness in the market to participate in this rally which makes us a bit careful.”
There is a strong chance that equity prices will be lower than they are now in the future, be it either within months or within years. That speaks for a careful attitude towards equities, and especially to those with high valuations (sic US equities).
But it’s also true that there are very few attractive alternatives to stocks: with inflationary pressures rising, cash will not preserve investors’ purchasing power, bond yields are very low and at least as vulnerable to a correction as equities, and absolute return funds haven’t done a great job either.
