BNP Paribas: Bonds no longer good hedges

Summary

Central bank tightening fuels volatility

• Financial markets are slowly grasp that central banks are no longer underpinning asset prices
  
• Sharper and sudden market moves look set to become the new norm
  
• This is likely to mean a renewed emphasis on fundamentals
  

Bonds no longer good hedges

• The ending of QE ends will lead core bond yields to move structurally higher
  
• This will make bonds less useful for portfolio hedging purposes
  

 What’s in the price?

• Some bad news is already priced into equities
  
• Previously elevated valuations have corrected sharply
  
• Stocks have started pricing in more bearish scenarios – this could have further to run

Asset allocation

Strategically neutral equities

• We still expect weaker (but robust) global growth with risks skewed to the downside
  
• With more volatility becoming the new norm, we remain structurally neutral equities
  

Underweight fixed income

Underweight core bonds on expectations of gradually rising inflation and monetary policy normalisation

Aiming to be tactical

With more volatility expected, we seek to be ever more tactical and reactive around our main structural proposition

Exploiting asymmetries to hedge and diversify

We continue to hold positions with asymmetries to our scenario analysis

Download the full report: Asset Allocation Quarterly