By Neuberger Berman Asset Allocation Committee
Valuations in private equity markets are elevated, but we still anticipate an illiquidity premium.
In commodities, we decided to lower our outlook to neutral due to an increased supply in industrial metals and energy. However, if inflation picks up, commodities could act as a hedge. In energy, we are concerned about rising supply as the U.S. is increasing its shale production amidst uncertainty around OPEC’s continuing production cuts.
We maintained our slight overweight on the hedge fund sector; inter-stock correlations have come down significantly, creating alpha opportunities on both the long and short side. In our view, distressed debt (with default rates low at around 3.2%) and global macro (with increased volatility in interest rates and currencies) strategies both look appealing. Managed futures, however, are not as attractive as they were because many market trends are breaking down.
Private Equity and Debt
As in public markets, valuations in private equity markets are currently elevated. However, we still anticipate an illiquidity premium over public equities. The trick is to get the execution right. Private debt markets are also experiencing large inflows and tighter valuations. We prefer adopting a steady investment plan rather than trying to time investments in the private markets.
USD: We have an overweight view on the U.S. dollar as the U.S. economy is expected to continue adding jobs above equilibrium job growth. Short-term yield differentials are also supportive, and tax reform may cause further dollar strength. The risks to this outlook are that inflation is still contained, the U.S. dollar is moderately overvalued, and there are lingering uncertainties around President Trump’s policies. It is also questionable how much dollar strength policymakers in Washington are willing to accept.
Inflation Has Begun to Pick Up in Europe
Euro Zone Consumer Price Inflation
Euro: We also have an overweight view on the euro. Forward-looking indicators such as PMIs and business surveys suggest that growth in the region will likely accelerate, while higher global growth in general could support the eurozone more than other countries. Other supporting factors include a large current account surplus and acceleration in headline inflation. Political risks are significant, as the French and German elections may create volatility. A Marine Le Pen victory in France is arguably the biggest threat. It’s also worth noting that ECB policy is still loose and any further pickup in inflation will make real yields even more negative. There are also lingering concerns about the banking system.
Yen: We have an overweight view on the yen and believe that the long yen remains a valid trade during a period of risk aversion. In support of our positive outlook, there is a growing current account surplus while purchasing power parity and real exchange rates suggest the yen is undervalued after its fourth quarter 2016 depreciation. There are also signs of reflation, which may alter the market’s perception of Bank of Japan policy. In terms of risks, there are now wide yield differentials after the increase in global yields. Also, market participants are not overly short the Japanese yen after paring back their positioning this year and disinflation is still apparent. Indeed, BoJ yield curve policy exacerbates the yield differentials against the yen.
Pound: We have a slight underweight view on sterling as recent economic data has surprised on the downside and suggests that the “Brexit” process will slow the economy in 2017. Political uncertainty is also likely to persist for an extended period now that Article 50 has been triggered. It is also possible that there will be a significant deterioration in confidence once inflation begins to bite. A weaker pound could also import inflation at a time when the Bank of England cannot raise rates. That said, the pound is already very undervalued, and there is also a risk that the BoE halts further easing and starts to react to higher inflation, which could attract foreign investors drawn by the weaker pound.
Swiss Franc: We have an underweight view on the Swiss franc, which we believe is still very overvalued. The Swiss National Bank will attempt to fight further appreciation, but its strong currency continues to cause disinflation and Swiss growth has slowed. However, the Swiss franc is one of the world’s most attractive funding currencies, and its appeal could be enhanced even further by increases in geopolitical uncertainty, the country’s positive current account balance and the large number of inbound M&A transactions.
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The views expressed herein are generally those of Neuberger Berman’s Asset Allocation Committee which comprises professionals across multiple disciplines, including equity and fixed income strategists and portfolio managers. The Asset Allocation Committee reviews and sets long-term asset allocation models, establishes preferred near-term tactical asset class allocations and, upon request, reviews asset allocations for large diversified mandates and makes client-specific asset allocation recommendations. The views and recommendations of the Asset Allocation Committee may not reflect the views of the firm as a whole and Neuberger Berman advisors and portfolio managers may recommend or take contrary positions to the views and recommendation of the Asset Allocation Committee. Any currency outlooks are not against the U.S. dollar but stated against the other major currencies. As such, the currency outlooks should be seen as relative value forecasts and not directional U.S. dollar pair forecasts. Currency outlooks are shorter-term in nature, with a duration of 1–3 months. Regional equity and fixed income views reflect a 1-year outlook. Asset Allocation Committee members are polled on asset classes and the positional views are representative of an Asset Allocation Committee consensus. The Asset Allocation Committee views do not constitute a prediction or projection of future events or future market behavior. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.
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