One Man’s Opinion: Can US Investors Shift To US Treasuries To De-Risk Portfolios?

In the first quarter, US markets witnessed lots of worries such as a stronger dollar, weak oil prices and the timing of an interest-rate liftoff; but that seems to fade away as the economy enters into the second quarter, said Kate Nixon, CIO at Northern Trust Wealth Management.

The energy markets have stabilized along with the greenback and despite the dramatic decrease in earnings expectations, companies have managed to top the lower expectations bar. Fundamentally, macroeconomic factors have started to look okay as some of the issues witnessed in the first-quarter were transitory in nature, including the effect of weather. The economy is likely to add a few basis points as the weather turns brighter and sunnier, she noted.

As the markets hit record highs, it’d be difficult to eke out much from the indexes and investors need to focus on individual stocks. Asked to comment, Kate said the base case for Fed’s rate lift-off remains September and rate hikes would be in very small steps, taking a non-linear path. Monetary policy will stay very accommodative, which will provide tailwind to risky assets, she observed.

Analysts have reduced their estimates for Q1 and Q2 GDP after the durable goods reading was published. Citi Private Bank reduced its over-weight allocation of US equities this week and has been gradually de-risking its portfolios in a period of elevated volatility though it’s not a year of financial restraint as most of the world’s central banks are still easing, said Steven Wieting.

Although Citi remains optimistic about the US economy, it has reduced overweight US equities from 3 percent to 2 percent. Investors are likely to see economic strength in the near term in the data that’d be reported in the month of May. April is also likely to show much improvement with last year’s pattern getting repeated when the weather beat down the economy.

However, there’s something more to the economy this time around; the pillars of US outperformance in equity markets have been reduced. The US has been at the center of the energy investment boom and that has been coming off for some time with lower oil prices, and although it benefits the consumers, for many US companies that’s been an issue.

There has been much noise about falling earnings in the US, but at the end of the earnings season – excluding the energy sector, earnings for American companies are likely to grow by 6 percent. For the energy sector, it’s a lost year; but investors need not value them for the entirety of the future on that basis. So the pillars of real outperformance for US equities have not diminished much, he explained.

Asked where allocations have been raised around the world after cutting US exposure, Steve said Citi has raised holdings in some of the underweight countries – holdings have been increased in commodity producers such as Australia, Malaysia etc, based on more stable commodity prices.

Additionally, Citi shifted some of the overweight in China and Hong Kong. That said, Citi also takes a broader view of its portfolios; when thinking about risks, investors should look at assets that would go up in price when equities and credit go down. Investors need to look back at October last year when US Treasuries rallied after US and global stocks fell 10 percent.

Now, investors are in an environment where German Bund yields are practically zero out to ten years while yields are insignificant in many other countries across the world. So while there’s a very low interest-rate profile in the US, investors can de-risk their portfolios by increasing allocations in US bonds, he concluded.

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