Though the ECB has begun to prepare markets for the eventual end of quantitative easing (QE), conditions that would support monetary tightening still seem a long way off for most European countries.
The one exception is Sweden, which was an early adopter of QE, where sustained economic growth and inflation mean the country is well placed for a change of stance from the central bank.
This is according to Mikio Kumada, executive director at LGT Capital Partners, who has gone long on Swedish krone in his most recent tactical allocation.
Kumada said the Swedish economy is experiencing rising growth, with inflation set to hit or exceed targets soon.
‘The real estate market has run hot while the currency is probably the most undervalued among the majors on a purchasing power parity basis.’
Another currency the asset manager is long on is the US dollar, based on US economic momentum and the country's political agenda.
‘The Federal Reserve will be increasing rates at a faster pace than last year, which means that current policy divergence will remain in place, even as the European Central Bank (ECB) has started to prepare markets for the eventual end of its quantitative easing programme.’
Both the US dollar and Swedish krone positions are held against a short CHF position, which was earlier shared with the euro.
‘Once the French election risks are put behind us and the ECB starts to be verbally more open to taper, the EUR might well stay stronger for longer. We therefore prefer to fund our long position with the overvalued CHF only.’
Despite a strong rally from last year’s lows, US energy infrastructure remains attractively valued, offering annual yields close to 7%, Kumada says.
He added that the firm has opened a new position in energy master limited partnerships.
‘While US tax reform plans pose a certain risk for this sector, that risk is mitigated by the new US administration’s broader benevolent stance toward the traditional energy sector,’ he said.
The asset manager remains underweight commodity equities, despite a stabilisation of prices and improved cyclical conditions.
Elsewhere in alternative investments the asset manager is underweight in listed private equity (LPE), where he said discounts to NAV have either narrowed to unattractive levels, or turned to premiums in some cases.