'We are positive about Freeport McMoran'
"Other interesting US stocks are Bank of America in financials and Home Depot in real estate."
Key points
Enrico Bovalini, head of balanced strategies at Amundi, explains the opportunities that can be seized through the multi-asset approach.
How would you describe the current global environment between growth dynamics, inflation and monetary policies and what are the main focus factors for a multi-asset manager?
We are in an end-of-cycle economic phase, with global growth close to trend. However, several fiscal stimuli are expected soon, in various regions, which could support a temporary re-acceleration of growth. At the monetary level, our forecast is for a further decline in rates, outside of Japan, while deregulation of the financial sector in the US is helping to keep monetary conditions accommodative. The latest inflation data are surprising on the downside in Europe, the US and elsewhere, so we think the current scenario may continue for a few months. The main point of attention is a possible upswing in inflation, induced by an overly strong economy, which would imply monetary tightening. Other risks may come from geopolitical instability, which may cause sudden rises in oil prices and/or increased volatility in the financial markets. A further risk is the sustainability of public debt, which is creating instability in interest rates at the long end of the curve (30 years).
In this framework, how do you build a risk-oriented asset allocation strategy?
As far as monetary policies are concerned, we expect further rate cuts in the US, Europe and emerging markets. Only in Japan are we seeing a rise. Should monetary policy change direction, the asset classes to be preferred would be government bonds from core countries, the yen as currency, and less cyclical equity sectors; however, this is not our main scenario. Geopolitical risks can also be mitigated with investments in commodities, oil and gold, which tend to appreciate in crisis situations. Our conservative strategy has an equity weighting of around 27%, with a predominance of US equities (13%) (with an underweight in meg-caps in favour of mid-caps), a sizeable allocation in European equities (8%), 4% in emerging markets and 3% in Japan. On the bond front, we have a duration of around 4.5 years, with a predominance of government bonds from the eurozone periphery, and a third in US bonds. Credit exposure is investment grade. Emerging bonds have a marginal weighting (around 7%). As for currency exposure, it is minimal in dollars (6%), around 10% in emerging currencies and 5% in yen. Finally, we have a 3% allocation in gold.
How much do central bank choices and the management of rate expectations weigh in the exposure between bond and equity components?
We assess how much the market has already discounted rate movements and how much we believe central banks can do, in light of the forecasts of our macroeconomic models. Depending on these expectations, and on our expectations for economic growth, we make asset allocation, duration and equity exposure decisions for the various regions. Currency risk management decisions, which are strongly influenced by central bank choices, are also very relevant.
Geopolitical uncertainty and global tensions continue to be a structural feature of markets. How do you integrate these factors into management, both for protection and tactical opportunities?
In recent years, our multi-asset portfolios have invested structurally in commodities, precisely to reduce the risks of geopolitical shocks. We also have a hedging component with options on equity indices and currencies, which allows us to reduce the risk of loss in stressed market situations.
