Increasing equities from neutral to overweight

Investment policy shift

(PresseBox) ( Zürich, )
Swiss & Global Investment Management, under the lead of Stefan Angele, has decided to increase the equity allocation to an overweight stance by investing cash holdings. The necessary cash reserves have been built up during the last couple of weeks by selling expensive government bonds.

Several reasons have led to the decision to overweight equities in our asset allocation going forward. Primarily, we believe that the current earnings season will confifi rm the healthy condition of the corporate sector and we expect that investor sentiment will improve following the positive news flfl ow, moderate valuations, the announcement of more quantitative easing measures and persistent low policy rates.

- While we kept a more neutral equity allocation during summer based on the risk-averse investor sentiment and high uncertainty on how the current accommodative monetary policy will develop, we have a general positive stance towards equities in the current economic environment.
- We believe that the latest strong commitment for quantitative easing measures (QE2) - especially in the US - puts a flfl oor to the risk of a strong correction. The major risk would be that central banks announced a u-turn in their policy and cancelled all of the planned measures.
- We anticipate a prolonged period of ultra-low policy rates in most developed countries which is bad news for income-oriented investors. It makes them look for higher-yielding investments which can be found in equities (attractive dividend yield), credit exposure or very long dated bonds.
- Investing in long dated bonds bears a highly asymmetric risk profifi le that makes such investments very unattractive in case of an even small increase in inflfl ation and thus interest rates. In such an environment, equities are a much more attractive investment.
- We expect a good earning season in the fourth quarter of 2010. Better-than-expected guidance from the corporate sector will improve investor sentiment and trigger more risk-taking from investors that need higher returns than they can get by investing in (government) bonds. Companies are delivering solid profifi ts and more upward revisions might become necessary by analysts.
- Valuations in most equity markets are not extremely cheap anymore, but still look attractive given the positive developments in many businesses. Not only earnings yields but also dividend yields are an appealing alternative to (government) bonds in the medium term (see chart). Companies continue to improve their operational leverage and gear up their balance sheet by taking advantage of the extremely low yields they have to pay on their corporate bonds by making the expiry of their fifi nancing longer and longer.
- Last but not least, a large part of the investor community is positioned very defensively and might face increasing buying pressure because of portfolio rebalancing and window dressing into the year end.

Equity investments provide attractive return potential without the asymmetric, negatively skewed risk profifi le we can observe in some other asset classes, at least in the medium-term. Qualitative selection and active management by experienced and professional portfolio managers even further increases the success potential of equity investments.
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