Brash decisions – you only live once (YOLO) – is the type of thinking that drives exuberance. Indeed, such exuberance in the retail trading community has gained a lot of attention lately. This has led many investors to ask whether markets are in the midst of a broad-based bubble. But away from pockets of retail-driven mania, sentiment and positioning has actually become less stretched recently; equity betas of multi-asset funds, CTAs and US equity funds have fallen. Survey-based sentiment has declined, as have our cross-asset risk appetite and options-based sentiment indicators. On the other hand, short interest in DM and EM equity and high-yield ETFs has increased. Our data science models also view the near-term risks as quite balanced (see Data Matter: Game on, 29 Jan 2020).

So given that very little has transpired to fundamentally change our thinking for 2021 –particularly since we first laid out our views for the year (see A glimpse into 2021, 20 Oct 2020) – we think now is a good time to scale up exposure to risk assets. We increase exposure to global equities, HY credit, and commodities at the expense of cutting DM sovereigns and IG credit. Our preferred hedges for the coming 3-6 months remain US Treasuries and gold.

Within sovereigns we prefer gilts and EUR non-core over EUR core amid continued central bank policy support. We remain overweight EM hard currency debt. Within IG and HY credit we prefer EUR credit. USD HY for example could see energy spreads continue to widen given the new US administration’s green agenda. We also prefer EUR HY over Eurozone equities, as the strong EUR is likely going to weigh on the EPS growth trajectory.

Within equities, we continue to be overweight EM equities and we add to US and UK equities. Here, the outperformance of EM equities doesn’t look stretched on our models. In the US, further fiscal stimulus, coupled with tailwinds from a weaker USD should pave way for further outperformance in this space. Meanwhile UK equities are heavily under-owned, look cheap vs tentative signs of improvements in relative RoE, and have underperformed significantly vs our estimates.

Within commodities, we are now overweight both gold and oil. Gold looks cheap vs longer-term US real yields on our estimates. In cyclical commodities, we prefer to take the direct exposure rather than indirectly via e.g. USD credit where increasing policy scrutiny could be an impediment to performance.