UIC lowers the risk positioning to neutral
Ad hoc decision by the UIC
- RoRo meter shifted from moderately bullish to neutral
Reduction of equity and highyield exposures
Underweighting of government bonds from core eurozone countries scaled back
At an extraordinary meeting, the Union Investment Committee (UIC) decided to change the general risk positioning of the UIC portfolio from moderately bullish to neutral (shift from level 4 to level 3 on the RoRo meter). Following the uptrend in equity and commodity markets and the positive performance of spread products in the fixed-income asset class, the UIC believes that the risk/reward ratio for risk assets is no longer as attractive. The economic recovery has now been largely priced in for risk assets. There are also emerging signs of the loss of pace that had been expected after the reopening. For example, the growth surprise indicators have recently started to flatten. Monetary policy continues to provide strong support, but the tapering debate will gain traction again going forward. Systematic investors (target volatility investors, pension funds) are also likely to scale back their purchases because most of them have now finished building up the proportion of equities in their portfolios.
In detail, the UIC pared back the equity position by adjusting equities from industrialised countries (down by 1.0 percentage point) and from emerging markets (down by 0.5 percentage points), and neutralised the overweighting of high-yield bonds. It also reduced the underweighting of government bonds from core eurozone countries (up by 2.5 percentage points) and established a small tactical cash position. The UIC therefore retained the overweighting of equities (despite the reduction), commodities and absolute-return investments. Companies’ second-quarter reports are expected to confirm that profits are continuing to rise sharply. The failure of OPEC+ to agree on a new increase in oil production is likely to support energy commodity prices given the current high level of demand.
Positioning adjustment from 20 July 2021
The Union Investment Committee (UIC) has made an adjustment to the positioning of the model portfolio. Uncertainty in the market has increased again in recent days. Risk assets have been particularly affected by the resulting pressure. The cause is a rise in new COVID-19 cases due to the spread of the delta variant, including in countries with high immunisation levels such as Israel. In many cases, hospital admissions have remained low so far, but it is unclear whether steps that have already been taken to ease restrictions may be reversed again if case numbers continue to rise. Our constructive outlook has not changed fundamentally. However, we do see some risk of disruption in the short term due to limited liquidity in some parts of the market during the summer holiday period. In addition, inflows into European equities have recently diminished again slightly. On this basis, we do not anticipate a rapid bounce-back after this weak patch. The second quarter reporting season has got off to a very encouraging start so far. However, these positive results have already been priced in to a large extent. This means that more importance will be attached to how companies assess their outlook, but these predictions will also be subject to uncertainty.
The UIC has therefore reduced the weighting of equities from industrialised countries by 1.5 percentage points. The resulting liquidity will be used to increase the cash position (+1.5 percentage points). The RoRo meter for the UIC portfolio remains set to neutral (level 3). Overall, the risk position of the portfolio remains slightly more bullish than the baseline allocation.
Unless otherwise noted, all information and illustrations are as at 6 July 2021.