Colin Graham, chief investment officer of multi-asset solutions, head of active asset allocation at BNP Paribas Investment Partners, is the first to admit the climate for risk assets remains challenging.
He notes it is an uncomfortable time in which to be an investor. The result of the UK referendum sent many balls into the air, and it is not yet clear where they will fall.
In this increasingly uncertain environment, Graham says, having a broad range of investment options in theory should be an advantage, but investors must judge the path of a wider range of assets.
It is not only the Brexit decision that is roiling markets; modest growth in the global economy and doubts about the efficacy of monetary policy are also creating volatility.
“Valuations are a good long-term indicator but they tell you nothing about what is going to happen in the next six months. "
In this febrile climate, his multi-asset team has been treading carefully. Going into the EU referendum, it kept a position of low risk.
Graham says: “In May/June, we reduced our overweight in equities and sold some of our high-yield bonds. We remained neutral on credit and did some short-selling as well. We believed the situation did not look clear.”
They also felt sterling was unlikely to rally, even if the vote was to remain. “We still think it could overshoot on the downside. The Brexit vote puts pressure on the currency account deficit.” They were short sterling versus the US dollar.
After the fall
Graham has not significantly shifted his position since the vote. He has not, for example, added to equities, in spite of the recent rally. “We saw the S&P move down and up again quickly. We manage around €40bn ($44.4bn) of assets and are not in a position to take advantage of such a short-lived fall.”
He still sees plenty of uncertainty, even if the UK’s immediate political troubles have been resolved. As a result, he remains underweight developed market equities over cash. He regards equities as expensive and thinks the earnings and dividend outlook is unfavourable. Within equities, the group’s portfolios are underweight Europe in particular.
Graham feels the market may be underestimating the likelihood of interest rate rises in the US, which is leading to the group’s overweight position in US treasuries and an underweight in US investment grade.
He says: “The market believes Fed rate rises are now off the table until mid-2018. We think the consensus is wrong on that but agree it could take time to work out the best time to raise. With the US presidential election in full swing, it is difficult to see another rate rise for the next six months.” Graham remains long the dollar as a result.
Making room for alpha
BNP Paribas’s investment approach combines top-down macroeconomic analysis with a close look at fundamentals. The group uses quantitative techniques to scan the investment universe for possible ideas.
The initial judgment will look at regions and asset classes but the fund managers will then delve into investment ideas. Underlying this is the belief that markets are inefficient and there is always room for alpha.
There are three main elements in the group’s evaluation of assets: valuations, macroeconomic trends and sentiment. Graham says: “Valuations are a good long-term indicator but they tell you nothing about what is going to happen in the next six months. We need to look at where we are in the cycle.
“In looking at sentiment, we are judging how people are positioned and whether they are fearful or greedy. What are the tail risks? What are option prices telling us?”
A key part of the group’s process is scenario planning. It holds a core scenario as to what the world might look like over the next six months. This assumes no unforeseen shocks. At the moment, it assumes ‘asynchronous’ growth – economic progress in the eurozone, US and Japan, while emerging markets continue to struggle.
