Goldman Sachs portfolio strategist, Christian Mueller-Glissmann, is getting more bullish on cash to position for and take advantage of expected elevated volatility.
“We upgrade cash to Overweight over 3 months to position for and take advantage of more volatility. With the potential for cross-asset correlations with oil to increase again should oil prices decline sharply, the potential for diversification is limited. Similarly, rateshock risk is difficult to diversify. Within cash we have a preference for the USD. We remain Underweight government bonds over 3- and 12-month horizons as inflation continues to pull yields higher and we still expect three Fed rate hikes this year. Over the near term, central bank easing, the dovish Fed, and lower oil prices might support bonds but we do not think US 10-year yields will trade below 1.75% for long.”
The firm remains remain Underweight commodities over 3 months and Neutral over 12 months. As supply adjustments take place, they believe commodities will become more attractive.
“Until then there is risk of a self-defeating rally as supply cuts might be delayed,” the strategists said. “We expect volatile oil prices in a US$25-45/bl range, which coupled with negative roll yields should result in poor risk-adjusted returns.”
The firm’s key Overweight remains credit as they believe credit valuations are already pricing a worse growth environment.
“We continue to prefer EUR IG (and HY) due to a combination of better technicals (especially with ECB credit easing), fundamentals and valuations. Following the strong relief rally in USD HY, over the near term, we think the risk/reward is least favourable if oil prices reverse course. We prefer USD IG to HY near-term. While we expect equities to rebound within a ‘fat and flat’ range once reflation gains the upper hand and as oil prices stabilise, we remain Neutral over 3 months. Until then, equities are likely to remain volatile.”