Asset Allocation Flash :

Following our release yesterday of our possible scenarios regarding the Grexit, Candriam has decided to maintain its strategic view on financial markets: the current stress caused by uncertainties upon Greece does not yet invalidate our long term scenario but bring short term volatility which requires more cautiousness. Considering this, we added tactical trades in addition to hedging strategy implemented several weeks ago.

Tactical Trades

Positions taken to face the current short term environment

On Monday 29th, we have reduced our overweight equities while keeping a good protection on our overweight Eurozone :

• We partially took profit on Japanese equities by selling futures as we have reached our first target level
• On our overweight Eurozone we are protected by our options strategy
   

We have increased our long position in USD which we consider as a good hedge against a tail risk in case of Grexit.

We kept a neutral exposure on peripheral country debt. In case of Grexit we think there would be an immediate reaction of the ECB to limit contagion.

Strategic View

Positions maintained as long as the current Greek crisis doesn't materially affect our macroeconomic scenario for 2015 and contagion is limited following a positive Greek vote next Sunday

Equities VS Bonds

We favour equities vs bonds:

• We think that interest rates will move up moderately towards the end of the year but we do not anticipate a continued strong repricing in yields in a context of limited inflation pressures, which should not derail equities performance
• Equities remain supported by solid economic fundamentals : PMIs across the main economic areas continue to be above 50 and economic surprises indexes have rebounded in Europe and in the US after decelerating.
• Despite Fed first rate hike remains a concern for investors, the US central bank showed a kind of cautiousness in its way to manage it and liquidity remain abundant mainly in Europe and Japan where central banks continue their massive bonds purchase programs. 
  
  

Regional Equity Strategy

We have a preference for Eurozone equities:

• Euro zone equities have one of the most attractive valuation relative to bonds, especially compared to the situation in the US.
• Euro zone equities are benefiting from improved momentum. Year-on-year earnings growth has been positive since the second half of 2014 and should continue to deliver in 2015, while US earnings are being penalised by a strong USD and the energy sector.
• The euro and oil price depreciation should continue to be favourable to euro zone equities.

We are positive on Japan:

• Valuations are more attractive and the Bank of Japan's additional measures should trigger a potential increase in earnings.
• Investors expect a substantial future increase in shareholder returns, helped by solid earnings growth and strong cash holdings.
• The change in the asset allocation of the GPIF, Japan's leading pension fund, is indicative of the sustainable support for Japanese equities

Fixed Income Strategy

We have a preference for diversification towards high yield and emerging debt:

• We are underweight in government bonds as there is less of a cushion to absorb any increase in rates
• We diversify to and are overweight on high yield and emerging debt in a context of abundant liquidity and as they offer the best carry-to-risk ratio (risk-return measure: yield-to-maturity divided by 1-year volatility)

Hereafter you can find a snapshot of the different scenarios we can define. We invite you to refer to our special report on Greece, Positive outcome possible after Greek referendum? for more details on our analysis.

Summary of grades:

Asset allocation:

Regional Equity strategy:

Fixed Income Strategy: