Inflation Linked Bonds Makes A Leap

Summary

• Any Inflation?
• Equities and Real Estate are still in favorite.
• European and Japanese Equities.

Inflation Linked Bonds makes a leap

Asset allocation is not high frequency trading, because of this there are annually only a few adjustments. This month there have been no major changes. After going through 66 asset allocation reports, underlying trends that might become important can be noticed.

Positive recommendation bonds

For the first time a decline in enthusiasm for equities appears from asset allocation reports. For example funds decreased their 'overweight' equity strategy by 5.6 percentage points, which now comes to 57.1%. Although this is the lowest score of the asset allocation poll since its launch, equities are still convincingly the most attractive asset class. The trend in positive recommendations for bonds continues, currently 10.5% recommends to invest in bonds. For commodities, the trend is downwards. Therefore bonds and commodities are, in terms of attractiveness, closer together. Currently, bonds are still the least attractive asset class.

Asset Allocation - recommendations and ranking

Rank#	Asset	Code	Trend	Recommendation	Rank#-1
1	Equities	URTH	↓	Overweight	(1)
2	Real Estate	IFGL	↑	Overweight	(2)
3	Cash	MINT	=	Neutral	(3)
4	Commodities	GSG	↓	Underweight	(4)
5	Bonds	AGG	↑	Underweight	(5)

Decline of Japanese equities

European equities are still considered the most attractive by the consensus group of 66 asset managers. This position was strengthened in April because in Japanese stocks no less than 15.2 percentage points were changed from 'overweight' to 'neutral'. Yet, still 52.6% of the asset allocation reports provides that they invest in Japan. This is however at odds with the message of Bank of America of Merrill Lynch, which said that fund managers for the first time since 'Abenomics' in 2012 are predominantly 'underweight' from last month.

Regional Allocation - recommendations and ranking

Rank#	Asset	Code	Trend	Recommendation	Rank#-1
1	Equities EU	VGK	↑	Overweight	(1)
2	Equities JP	EWJ	↓	Overweight	(2)
3	Equities Pacific ex JP	EPP	↓	Neutral	(3)
4	Equities US	SPY	↓	Neutral	(4)
5	Equities EM	EEM	↓	Underweight	(5)

Credit Allocation - recommendations and ranking

Rank#	Asset	Code	Trend	Recommendation	Rank#-1
1	High Yield Bonds	IHY	↑	Overweight	(1)
2	Corporate Bonds	IBND	=	Neutral	(2)
3	Inflation LB Bonds	GTIP	↑	Neutral	(3)
4	EM Debt Bonds	EMB	=	Neutral	(4)
5	Government Bonds	IGOV	=	Underweight	(5)

Sharp increase in Inflation Linked Bonds

Last month, sentiment improved for High Yield and Inflation Linked Bonds. High Yield got 8.8 percentage point more recommendations for 'overweight'. But what really catches the eye is the jump that Inflation Linked Bonds have taken. The recommendation 'overweight' rises sharply by 13.3 percentage points to 33.3%, which is the highest level since September 2014. Although the expectations of inflation of Central Banks are positive, the rest of the financial world looks at this more skeptical.

Since January this year, the consensus recommendation of Inflation Linked Bonds raised from 'underweight' to 'neutral'. The positive trend is clearly shown in the graph above, the green bar is rising steadily since November 2015. Where the Central Banks focus on inflation, it seems that this focus has a restricted extend in the economy. The consensus group apparently provides for inflation and is increasingly more aware of this bond category, judging by the fact of rising positive adjustments. For now, the consensus recommendation remains at 'neutral', but who knows, maybe inflation is coming!

List of asset managers and their asset allocation reports:

Eelco Ubbels RBA