Equities

Based on normalised profits, equity valuations are not particularly attractive.

In the longer term, an environment characterised (among other things) by:

• weak growth in industrialised countries and a risk of more frequent recessions,
• increasing intervention in the economy by governments to ‘solve problems’,
• growing tensions between countries with a risk of protectionism,
• growing social tensions,
• a potential risk of high inflation in some countries,
• a risk of payment default in other countries
• a risk of a eurozone breakup,

does not point towards higher multiples. Quite the opposite.

Our strategy

• Buy high quality companies (with low gearing, a competitive advantage, and high profitability) and reduce market risk by selling equity index futures
• Maintain a bias in favour of ‘emerging’ markets (South-East Asia and Brazil)
• Focus on dividends.

Asset allocation

 * Hedging

Bonds

In a high-debt/low-growth environment, the risk of deflation is greater than the risk of inflation. This is beneficial to high-quality government bonds. The problem lies in the fact that high-quality bonds are becoming scarcer in industrialised countries and that those currently seen as such (e.g. Germany and the United States) are offering very low yields.

The often-better fundamentals of emerging markets are an argument in favour of their sovereign debt but the interest rate differential between emerging and industrialised countries has already narrowed considerably.

Our strategy

• Generally avoid currency risk on the bond portfolio
• Restrict euro-based portfolios to North Europe sovereign debt
• Actively manage the weighting and duration of the bond segment according to long-term interest rate trends: with an increase in March/April 2011 after the sharp upturn in bond yields between October 2010 and April 2011, and a decrease at the moment after the sharp downturn since May
• Invest opportunistically in the sovereign debt of certain emerging markets (in euros/dollars but mainly in local currency)
  

10-year German bond yield and bond allocation of BL-Global Flexible

Currencies

In an environment of weak growth and a risk of deflation, no government wants a strong currency. Some countries can more easily encourage a depreciation of their currency than others.

Neither of the two main currencies, the euro or the dollar, currently inspires great confidence. Periods when risk aversion has increased have been favourable to the dollar in the past, but the jury is still out on whether, after two rounds of QE and the prospect of a third, the US currency can still be considered as a safe haven.

At the present time, it is impossible to predict the consequences of the European crisis on the euro: a breakup?, a stronger euro (exit of Greece, Portugal, ...)?, a weaker euro (ECB loss of credibility, Germany to exit, …)?

The authorities of countries considered for the time being as a safe haven (Switzerland, Japan) are actively acting against any appreciation of their currency.

The fundamental trends argue in favor of an appreciation of Asian currencies in the long term.

Currencies connected to commodities are attractive, especially if they are from countries with solid fundamentals.

The interest rate differential between the principal currencies in industrialised countries is disappearing as interest rates home in on zero pretty much everywhere..

Our strategy

• Consider currency allocation as separate from asset allocation using forward sales to increase/decrease exposure to certain currencies
• Maintain significant exposure to the portfolio’s base currency to limit volatility
• Prefer currencies of countries with solid fundamentals (a budgetary surplus, current account surplus, low public debt): especially SGD, CAD, NOK and SEK.
  

Currency allocation before hedging

Currency allocation after hedging

The above strategy has helped BL-Global Flexible to hold up well during the markets' decline in July and August, despite its net equity allocation of 45%.