SSgA readjusts in risk-on move

State Street Global Advisors (SSgA) has made a tactical reallocation to equities, most notably in Europe, on the understanding that accommodative monetary policy will continue to underpin the market.

The US fund house has sharply increased its exposure to MSCI EAFE – the index covering Europe, Australia and the Far East – from 2.5% in December to 6% in January.

Christopher Probyn, SSgA’s chief economist, confirms it is overweight Europe, chiefly from a valuation perspective. While he expects discrepancies between European countries, he believes the German economy will be strong and that the zone will improve in the second half.

In a similarly positive outlook, SSgA has also moved to overweight the MSCI Emerging Markets Index to +1% this month, from -1% in December.

Probyn says this is in expectation of a recovery in the global economy to 3.3% growth in 2013. This will be driven by expansion in developing nations, which it forecasts at 5.4% this year, against 1.3% for advanced economies. “When [the global economy] reaccelerates, emerging markets will benefit a lot,” he reasons.

SSgA sees China in better shape, with growing electricity output indicating increased production activity. Probyn forecasts GDP growth in China of 8% for 2013. With economic acceleration, policymakers may not cut reserve requirement ratios and interests rates.

However, given that China is experiencing structural economic change, it’s possible that policymakers might tolerate slower growth to boost consumption. It expects economic growth to range between 6.5-8%, from 8-10% previously.

Similarly, Bank Sarasin anticipates that EM equities will outperform in 2013 on the back of a positive growth surprise from China. It expects cyclical sectors to follow the seasonal sell-in-May pattern of the last three years, to drive equity prices.

Cyclical sectors also hold out the promise of higher returns in the first half of this year, with industrials, technology and insurance shares offering potential, it says.

It sees a trend towards high-growth dividend-paying stocks as likely to continue, with emerging markets outperforming at the beginning of the year, and US equities gaining relative strength in the second half.

But SSgA cut its exposure to US equities this month, with a 0.5% underweight on both the Russell 1000 Growth and Russell 1000 Value indices, from a 0.5% overweight the month before.

Aside from equities, State Street is taking a positive stance on corporate credit, while underweighting tools and assets that offer inflation protection such as Reits, commodities and treasury inflation-protected securities.

It argues that the economies of Europe and the US are still in bad shape. SSgA forecasts a GDP contraction of 0.3 percentage points in Europe, with a rise in unemployment.

It notes that while the US housing market is showing signs of improvement and household balance-sheet repair is winding down, the fiscal cliff will see the US tighten fiscal policy by $160-$210 billion, or 1-1.3% of GDP. That will restrict US economic growth to 1.7-2% this year, it expects.

Sarasin, meanwhile, believes bond markets will continue to be dominated by the hunt for yield and uncertainty about Euroland and the economy. It believes peripheral and EM bonds will benefit, while long-term interest in safe havens will increase.

It expects brisk demand in higher-risk bonds, although economic clouds in the second half will likely bring lower rates on US Treasuries and higher credit spreads on high-yield, peripheral and EM bonds.

SSgA had $2.06 trillion in global AUM as at the end of last year, of which $210 billion (10.1%) was sourced from Asia-Pacific, by AsianInvestor numbers.