The new semester is opening with various ideas that can help outline the scenario. It can be read in the report “Events & Comments – Volatile Summer: Scenario and Operational Opportunities for the Half Year” by Antonio Cesarano, Chief Global Strategist of Intermonte, according to which “signs of caution from the bond world (falling rates and flattening curve since April) are starting to materialize in the form of fears for the variant, subdued macro data and price war on oil”. All factors that increase the perception of uncertainty.
“The short-term emotional reaction has led to increased volatility with equity markets under pressure and bonds rewarded with sharply falling rates, but, in hindsight, the conditions are also created for the continuation of the rally in the second half of the year” he explains Cesarano. There are though two distinctive features compared to the first half: “A six-month performance that is no longer double-digit and greater volatility, especially in summer (Covid in summer is a novelty compared to summer 2020)”.
Slowdown on the way?
“The presence of risk factors that foreshadow a slowdown in a few quarters, promptly signaled by the flattening interest rate curve, allows us to support the request for still very accommodating central banks and further fiscal measures on the government side”Reads the report. The slowdown, according to Cesarano, “could be caused, on the one hand, by wage growth not up to par with the dynamics of prices and, on the other, by persistent bottlenecks, especially on the Asian front, where the control of the virus does not take place. through vaccinations but through tracking and partial lockdowns (reason, for example, of the partial closure of some Chinese ports), which leads to an increase in transport costs and increasing delays in deliveries “.
In other words, the report reads, “the idyllic scenario for the markets (what the Anglo-Saxons call goldilocks) would be represented by a growth that recovers but not to the point of making central banks turn around. Growth with formidable risk factors (Delta variant and upcoming fierce US / China clash), to the point of inducing greater stimuli for longer ”.
How to operate on the markets
According to the Intermonte manager, “The possible summer turbulence can be an opportunity to reposition ourselves more in the sectors that benefit from a scenario of falling rates and flattening curves: in general tech or in any case all the sectors most sensitive to falling rates (such as, for example, renewables with the use of ad hoc thematic ETFs, trying to avoid those with excessive concentration in a few stocks). To this we can also add the utility sector which has the triple advantage of rigid demand, presence in the energy transition and benefit from falling / flattening rates on the debt side ”.
On the bond front, the report reads, “the summer period up to the electoral parenthesis of the municipal councils could tend to be less favorable for BTPs. However, it could be useful to exploit the higher rates of the long-term part of the BTPs in the face of futures sales on 10y duration weighted BTPs, in order to also exploit the flattening trend ”.
On the corporate / financials front, Cesarano writes, “the strategic review of the ECB raises the growing need to increase the weight of the green bond component in the portfolio, which therefore must be taken into greater consideration. Any temporary phases of widening of the spreads on Italian corporates in the summer period could be partially covered by appropriate optional structures on the Ftse Mib, given the good correlation between corporate spread and equity indices ”.
Finally, concludes Intermonte, “in the phases of temporary rate hikes, it could be take advantage of positioning on short duration US high yield and, on the opposite extreme, the very long-term Treasury part, to take advantage of the trend outlined on rates / curve. In this case, the ETF sub-fund can easily allow positioning ”.