By Neuberger Berman Asset Allocation Committee
Lower-Volatility Hedged Strategies and new private equity commitments are often viewed favorably when market valuations are high.
The Committee voted to maintain a Neutral outlook. Recent data has shown less inflation pressure, particularly as energy prices have been weak, but if inflation picks up due to higher energy prices, pent-up demand, or wage increases, commodities could act as a hedge. For the time being, oil remains range-bound as the U.S. shale supply comes back on line, and strong metals reflect the global growth backdrop.
The committee maintained its Above Normal outlook for Lower-Volatility Hedged Strategies and its Neutral outlook for Directional Hedged Strategies. As a result of concerns around fixed income valuations, some investors are looking for "ballast" to go into their diversifying and lower-volatility portfolios. At the same time, a lack of market direction, paired with rising dispersion within markets, may be improving the picture for the alpha-driven strategies that account for many in the lower-volatility group. Global macro and trend-following strategies have continued to struggle. Credit long/short is still likely able to exploit the flow distortions caused by passive investors. Lower default rates likely mean that the opportunity set for distressed asset strategies remains constrained.
The Committee revised its outlook from Neutral to Above Normal. Despite elevated valuations, private equity still looks attractive relative to public equities, especially when taking into account the liquidity premium. Today's private equity deals are notably less risky compared with those of 2007, and one reason for that higher level of quality is the presence of more private companies relative to public, creating a wider set of opportunities to choose from.
USD: We maintain a Neutral outlook for the dollar. In the near term, we are slightly more bullish as short-term yield differentials remain supportive, U.S. economic data has been improving, and the combination of the potential for progress on tax reform and the substantial short held by the market could cause a surprise on the upside. We do not anticipate sustained appreciation over the longer term, however, as the inflation outlook remains subdued and the dollar is already moderately overvalued on a PPP basis.
Euro: We maintain a Neutral outlook for the euro. In the near term, we are slightly more bearish, given the recent sharp appreciation, which has priced in the tapering of QE and the improvement in European economic fundamentals. We believe that the ECB will maintain QE into 2018, but this fast appreciation of the currency may force the central bank to revise its inflation forecasts downward and be more cautious with the pace of its removal of extraordinary monetary stimulus. Longer term, support is likely to come from forward-looking economic indicators that still forecast above-trend growth and the large surplus in the Eurozone's current account.
Yen: We maintain an Above Normal outlook on the Japanese yen based on Japan's strong current account balance, the recent appearance of green shoots in the economy and the fact that several valuation metrics indicate that it is undervalued. Nonetheless, it remains true that disinflation still stalks the economy and the Bank of Japan's yield-targeting strategy exacerbates already-wide yield differentials in favor of other currencies.
GBP: We maintain a Neutral outlook as the currency has rebounded strongly from extremely low levels since the Bank of England signaled that it is closer to raising interest rates. We also see a continued stream of supportive cross-border M&A activity. The market nonetheless remains underweight the currency, and it is markedly undervalued on a PPP basis, which leads us to hold a slightly more bullish view in the near term. The downside risks include ongoing political uncertainty around Brexit and a recent downturn in consumer spending power and hard economic data.
Swiss Franc: We maintain a Below Normal outlook for the Swiss franc, which looks markedly overvalued on a PPP basis and vulnerable to ongoing outflows as the demand for safe havens declines in response to Europe's improving economic prospects. Currency strength continues to cause disinflation, and the Swiss National Bank looks set to keep on fighting further appreciation. Switzerland still runs a positive current account balance, however, and a strengthening Europe is ultimately good news for the Swiss economy. Moreover, any flare-up in geopolitical uncertainty could revive safe-haven flows.
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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 recommendations of the Asset Allocation Committee. 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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